Pan Europa Foods is company, located in Brussels, Belgium, producing high-quality ice cream, yogurts, bottled water and fruit juices. Its products are sold throughout Scandinavia, Britain, Belgium, the Netherlands, Luxemburg, western Germany and northern France. In January 1993, the senior-management committee of Pan-Europa Foods must decide which major projects to fund for that year. The available funds for implementation is set as 80 million euros. However various managers, have proposed projects totalling 208 million euro. Capital rationing has been identified as the main problem that the management of the company has to deal with. The management has to identify projects that would best achieve benefits of strategic importance. Problem statement
According to case there is no evidence that projects would be proposed with some alignment to any strategy, mission or vision. There are only few criteria defined that projects should apply to, like Minimum Payback period, expected IRR, etc. There is no strictly defined project selection methodology in place. The project selection is based on the discussions and voting by the seven managing directors. The financial tests were the payback period and internal rate of return, which meant that the time value of money was ignored. Analysis
The current funding for Pan Europa is mainly rooted in debt financing – debt-to-equity ratio is 125%, that is more higher than most of they peers have. After price war is over, Pan Europa bankers strongly recommended to reduce debt level significantly. Therefore company should pay attention on actions how to decrease capital spending. There might be several finance based methods for project evaluation in place, like NPV, Annuity (due to project characteristics), IRR, etc. And the results for evaluation might differ significantly. Like, if we are looking for long term activities, then, using annuity calculation we will find that preferred project would be the Strategic...
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