The case of Euroland Foods S.A. is about a multinational company that produces high-quality ice cream, yogurt, bottled water, and fruit juices. Euroland Foods was founded in 1924 by Theo Verdin. The performance of the company was steady over the years, but since 1998 to 2000 the company had no growth. The management team thought that was because of the low population growth in northern Europe and market saturation in some areas. The management team hoped that increase in market share and sales would help company growth.
Eurplamd food has a senior management committee meeting at every beginning of the year. The meeting will help company’s board director to decide the new capital budget in this year. In the latest meeting in January 2001, the senior management committee gave company’s board of directors 11 major projects, total counted about EUR316 million, but in this year the spending limit on capital project was only EUR120 million, so it was necessary to choose the right projects that will help company growth and maximize the shareholders’ wealth.
In these 11 projects, four projects are about product or market extension, three projects are about new product or new markets, three projects are about efficiency improvements, and one project is about safety or environmental. The company has a minimum acceptable IRR and maximum acceptable payback years in each category. You can find the information on Exhibit 1.
Ranking all these projects was the first thing need to be done. Based on the NPV at Corp.WACC(10.6%) and IRR gave the best understandable answer to the company’s board of directors. You can find this ranking of criteria on Exhibit 2.
The first one in the ranking list is the project of Strategic Acquisition. The project has a high return EUR198.5 million, but the expenditure was high too about EUR55 million. The second one on the ranking list will be the Southward Expansion, the expenditure of this project is EUR30 million. The project will generate about EUR56.25 million in 10 years. Number three on the ranking list will be Artificial Sweetener or Eastward Expansion, the payback period and NPV in these two projects are almost same. There is only about 1.7% IRR different between these two projects and the paybacks were the same, both were five years. So based on Purely Financial Considerations and under EUR120 million spending limit, the company can choose from the top four projects to decide the capital budget.
The Exhibit 3 was based on projects spending and the Exhibit 4 was based on projects return. These two ranking list show the different between each project’s scales. The ranking list shows that normally large amount investment will have large amount return. Except the project of New Plant( Dijon,France), This project has the second biggest expenditure in the list but only rank the 5th in return.
The Exhibit 5 shows the Profitability Index of each project. The best one in this ranking list will be the project of Snack Foods. Its Profitability Index is 1.14 which means each 1 Euro investment will have 1.14 Euro in return. Also you can find each project’s profitability Index calculation steps in Exhibit 6.
The Exhibit 7 shows the Payback period. The payback period shows the risk of each project, usually the project has a shorter payback period will have less risk. The best project in this ranking list will be the project of Inventory-Control System; it only has 3 year payback.
In Exhibit 8 will indicate the First year cash flow of each project.
The Project of the Effuent-Water Treatment at Four Plants wasn’t including in any of the ranking list because this is the project that classed in the environmental category. The project requires a EUR6 million investment today and will cost EUR 15 million in four years when the immediate conversion become mandatory. The company should accept this project today because in both financial aspect and social...