1. Using the company's cost of capital, the net present value (NPV) is the sum of the discounted cash flows minus the original investment. One of the major problems with Pan-Europa is their existing low stock price. In order to increase their value, they must take up projects that increase their stock values, including those that would allow them to increase gross sales that have been stagnant over the years. The values presented in Exhibit 3 allow us to compare these projects based on various factors. Considering NPV as a factor, it is suggested to compare the value of “Equivalent Annuity” of a project, which is that level annual payment over 10 years that yields a NPV equal to the “NPV at Minimum ROR”, thus, correcting the difference in duration among various projects. Thus, the projects can be ranked as:
a. Acquisition of a leading schnapps brand and associated facilities. b. Market expansion eastward.
c. Development and rollout of snack foods.
d. Market expansion southward.
e. Networked, computer-based inventory control system for warehouses. f. Development and introduction of artificially sweetened yogurt. g. A new plant.
h. Expansion of a plant.
i. Plant automation and conveyor systems.
j. Replacement and expansion of truck fleet.
k. Effluent water treatment (since the water-treatment equipment could be purchased today for ECU4 million; and it is speculated that the same equipment would cost ECU10 million in four years when immediate conversion became mandatory.)
2. The non financial aspects that we have to consider in project selection, in addition to financial aspect, are strategic, technical, commercial, political, social, environmental, organizational, human resource and management .Some of the factors that might invalidate the strategic financial analysis using NPV may include:
a. Amount of risk associated with each of the projects.
b. Availability of competent infrastructure and resources for a specific project. c. Prevalent political considerations.
d. Other considerations associated with health, safety, environment, etc, that may require compliance with regulations for the projects taken up. e. Impact on the image of the company, for instance, taking up the effluent water-treatment project may boost the brand name for the company even though NPV analysis for the same is not feasible. f. Impact on the business strategy of the organization.
g. Inconsistent data collection techniques used for the evaluation. h. Feasibility analysis of implementing projects side-by-side, for instance, if two projects require same type of resources and in the same number, with the corporation having only a limited number of them, taking up both the projects would not be feasible.
3. Reconsidering the projects in terms of:
a. A “must do” project of non-numeric type would definitely be the “Effluent Water Treatment” project because not taking up the project may lead to impairment of the image of the company in the eyes of the consumer of they fail to comply with the European Community directives. Another “must do” project of non-numeric type would be “Plant automation and conveyor systems” since it would result in employee satisfaction. At the same time, it would also save the organization unnecessary lawsuits (that may also hinder the company’s reputation) filed for employee injuries.
b. The involvement of technology would be an element that is expected to increase or decrease the risk factor. For instance, the project related to introduction of conveyor systems involves technology to a great extent, thus, increasing the risk element involved in taking up the project. Whereas, the “Replacement and Expansion of truck fleet” involves minimum or no technology, thus, decreasing the element of risk involved. Also, the idea of introduction of a completely new product to increase sales increases the risk element because it may backfire if there are...
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