Project Portfolio Selection - Case Study

Only available on StudyMode
  • Download(s) : 799
  • Published : November 6, 2010
Open Document
Text Preview
Strategically, what must Pan-Europa do to keep from becoming the victim of a hostile takeover? What rows/categories in Exhibit 2 will become critically important in 1993? What should Pan-Europa do now that they have won the price war? Who should lead the way for Pan-Europa? Pan-Europa’s ball and chain is its debt. With a debt-to-equity ratio of 125%, the company is leveraged more than its competitors. Pan-Europa’s bankers have become unwilling to provide additional credit, which is unfavorable if conditions call for the purchase of a large block of common stock to prevent a hostile takeover. As a preventative measure, Pan-Europa must bolster shareholder confidence by continuing to pay the dividend and driving up earnings, which should drive stock price up. Showing annual revenue growth through wise capital investment is crucial in 1993. Exhibit 2 below shows the company’s flat trend in gross sales, declining net income and earnings per share. Clearly these are signs of an overleveraged organization. Investment firms are already recommending selling Pan-Europa stock, driving the market price down. Fiscal Year Ending December 31|

 | 1990| 1991| 1992|
Gross sales| 1,076| 1,072| 1,074|
Net income| 51| 49| 37|
Earnings per share| 0.75| 0.72| 0.54|
Dividends| 20| 20| 20|
Total assets| 477| 580| 656|
Shareholders' equity (book value)| 182| 206| 235|
Shareholders' equity (market value)| 453| 400| 229|
To remedy this situation, Pan-Europa must leverage their existing market share. The existing financial condition is due to a price war that helped increase market share. Now is the time to put that increased market share to work. Investment in new product development provides the opportunity to leverage the newly gained market share. Fabienne Morin has proposed two projects that capitalize on the Rolly brand but also takes advantage of the opportunity to put these new products in front of those new customers. Using NPV, conduct a straight financial analysis of the investment alternatives and rank the projects. Which NPV of the three should be used? Why? Suggest a way to evaluate the effluent project. Table 1 - NPV @ Corp WACC| | Table 2 – NPV @ Min ROR| | Table 3 – Equivalent Annuity| Project| Name| | Project| Name| | Project| Name|

11| Strategic Acquisition| | 11| Strategic Acquisition| | 11| Strategic Acquisition| 7| Eastward Expansion| | 7| Eastward Expansion| | 7| Eastward Expansion| 8| Southward Expansion| | 9| Snack Foods| | 9| Snack Foods| 9| Snack Foods| | 8| Southward Expansion| | 8| Southward Expansion| 4| Artificial Sweetener| | 4| Artificial Sweetener| | 4| Artificial Sweetener| 10| Inventory-Control System| | 2| New Plant| | 10| Inventory-Control System| 2| New Plant| | 10| Inventory-Control System| | 2| New Plant| 3| Expanded Plant| | 3| Expanded Plant| | 3| Expanded Plant| 5| Automation and Conveyer Systems| | 5| Automation and Conveyer Systems| | 5| Automation and Conveyer Systems| 1| Expanded Truck Fleet| | 1| Expanded Truck Fleet| | 1| Expanded Truck Fleet| The tables above illustrate the relative ranking or financial desirability of the projects using different types of NPV calculation. Given the three methods of NPV, NPV at minimum ROR is superior to NPV at Corporate WACC due to the need to provide returns at a rate based on the type of capital investment and its associated risks. The Equivalent Annuity method improves on the NPV at minimum ROR by taking into account the difference in project lengths, therefore the Equivalent Annuity method provides a more precise ranking of projects based on their payback potential. The question surrounding the effluent water treatment project is one of timing. Another relevant question is can Pan-Europa afford to not build the effluent water treatment plant. Unlike the other ten projects, the effluent project won’t make...
tracking img