Euroland Foods S.a

Topics: Net present value, Capital budgeting, Investment Pages: 3 (677 words) Published: March 29, 2011

Teaching Note

Synopsis and Objectives

Suggestions for complementary cases on measures of investment analysis: “The Investment Detective” (Case 17); corporate resource allocation: “Victoria Chemicals (A) and (B)” (Cases 22 and 23); “Target Corporation” (Case 19). In January 2001, the senior management committee of this company has to decide which major projects should be funded for implementation by the company starting in 2001. The board of directors has arbitrarily set a limit of (euros) EUR120 million to be spent on capital projects in 2001. Various managers, however, have proposed projects totaling EUR316 million. The task for the student is to evaluate the completed discounted cash flow (DCF) analyses which the case presents, along with qualitative factors (mainly strategic considerations and internal politics of the company), and to choose the projects to be approved.

The main objectives of this case are (in descending order):

To explore the problem of resource allocation within corporations. By looking at many projects and the senior-management perspective, this case is a useful complement to other capital-budgeting cases that focus on single projects. •To illustrate and assess the impact of capital rationing on capital investment decisions. The results usually reveal selection of economically suboptimal capital budgets. How this selection arises is an important learning point (see Exhibit TN1, which is suitable for the basis of a minilecture). •To exercise and interpret the implications of classic tools of investment analysis (e.g., net present value [NPV], internal rate of return [IRR], payback), and to consider possible adjustments for differences among the projects in risk (e.g., through the use of risk-adjusted discount rates), size (e.g., through the profitability index), and life (e.g., through using equivalent annuities, replacement chains, or both). •To consider the impact of behavioral influences on...
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