Corporate finance
Thomas Tran
Eyituoyo Ofuya
EUROLAND FOODS
Euroland Foods, which was founded in 1924 by the Theo Verdin, had its capital budget of EUR120 million. However, they had eleven projects which were estimated to spend EUR316million far beyond EUR120 million spending limit prescribed by the board. It will be a challenge for senior managements to allocate funds for these projects. As it is shown in exhibit 1, these projects are Preplacement and expansion of the truck fleet, a new plant, expansion of a plant, development and rollout of snack foods, plant automation and conveyor systems, effluent water treatment at four plants, market expansion southward, market expansion eastward, development and introduction of new artificially sweetened yogurt and ice cream, networked, computer-based inventory-control system for warehouses and field representatives and acquisition of a leading schnapps brand and facilities. These 11 projects could be divided into 4 type, including new product which needs a 12% minimum acceptable IRR, market expansion, which needs 10 % minimum acceptable IRR efficiency improvement, which needs an 8% minimum acceptable IRR.
The Euroland Food company has been a prominent player in the dairy and water market in Europe for the past two decades. Due to current market shrifts and new competition, however the company is struggling to grow. A recent attempt at increasing the market share resulted in serious debt for the company. Shareholders becoming anxious and a limit on spending for the 2001 financial year, the company must be creative in implementing new expansion strategies that will impact both existing markets and ideally open new market as well. The report seeks to clarify and examine the current options for market expansion in the company as stated in the proposals of the various and project board members which were, Wilhemin Verdin from Belgian. The granddaughter of the founder and spokesperson on the board of directors for the Verdin familys interests. Next was Trudi Lauf, finance director. Hired from Nestle in 1995 to modernize financial controls and systems. Was very vocal on reducing leverage on the balance sheet and also voiced his concerns of stockholders. Heinz Klink was the managing director for distribution that oversaw the transportation, warehousing and order fulfiment activities in the company. Maarten Leyden. Managing director for production and purchasing. Managed production operations at the company’s 14 plants. He a fanatic about production cost control.[pic 1]
Marco Ponti managing director of sales, oversaw the field sales force of 250 representatives and planned changes in geographical sales coverage. Fabienne Morin. Managing director for marketing. Responsible for marketing research, new product development advertising, and in general, brand management. Perceived a window of opportunity for product and market expansion and tended to support growth-oriented projects. Nigel Humbolt. Managing director for strategic planning. Hired two years previously from known consulting firm to set up a strategic planning staff for euroland foods. Supported initiatives aimed at growth and market share. The current evaluation system for all projects required. The projects that did not meet these goals were rejected, however given the current dissatisfaction stemming from the shareholders, the board is willing to consider other options for evaluation as well. In order to aid the board in this evaluation. The first data analysis offers the two traditional problems. The second data analysis reviews other issues such as company goals and the effectiveness of each project in meeting the current issues. The main issue is what proposals the senior management committee should present to the stockholder for the 2001 financial year to revive the company’s stalemated profits, reducing the high debt percentage, and compete increasing market competition, along with this issue are concerns regarding the boards flexibility in evaluating each proposal as well as the current spending limit for the calendar year. The other issue is to decide whether to offer a dividend or reinvest profits for the year into the company.
Some strength and weaknesses of investment used by euroland are payback periods, IRR, minimum accepted ROR and NPV. The payback period is length of time required to recover the cost of investment or project is important determinant of whether to undertake the position or project, as longer payback periods are typically not desirable for investment positions. the payback method is popular with business analysts for several reasons. 1 is the simplicity. Using the payback method and reducing the evaluation to a simple number of years. Identifying projects that provide the fastest return on investment is particularly important for companies with limited cash that need to recover their money as quickly as possible. The shorter the payback period, the less risk the investment is. The IRR measures the rate of return of projected cash flow generated by your capital investment. The IRR for each project under consideration by the company and used in the decision making. The advantage of IRR is that the timing of cash flows in all future years are considered and therefore each cash flow is given equal weight by using the time value of money. IRR is an easy measure to calculate and provides a simple means by which to compare the worth of various projects under consideration. The IRR provides any business owner with a quick snapshot of what capital projects would provide the greatest potential cash flow. A disadvantage of this method is that the account for the project size when comparing projects. Cash flows are simply compared to the amount of capital outlay generating those cash flows. This can be a problem when two projects require a significantly different amount of capital outlay, but the smaller project returns a higher IRR. With this case study we have 11 projects with all different goals to get the euros up. The IRR has its own limitation. There is little attraction in that investment and secondly the investment risk rises when the investment has long length. If the payback period is long it can lead to missing on likely new investment opportunity. The advantage of minimum accepted ROR compared with other measurements, the biggest advantage of minimum accepted ROR is its convenience there is no need to do the complex calculation about discount or other things. The disadvantages of ROR. Simplicity always takes hand with many inaccurate consequences. The minimum does not take into account any elements like the time value, size of investment and whatever. So pretty much when there not too many choices on other factors. NPV the assets of NPV are taking into account of the time value, the investment size and the term structure. The liabilities of NPV, it does not consider the impact of the investment. Project 1 expansion of truck fleet. The overall amount to be spent on this project is 33 million dollars. This suggestions does not pass the IRR test , as its IRR is only 7.8% and 8% is required. It also fails the payback test as payback would take 7 years as opposed to the required 4. Project 2 new plant. This project suggestion meets the company’s IRR standard of 10% but it fails the payback of 5 years, doubling the time for payback. Project 3 expansion of plant. This proposal is to expand a plant in Germany that has already reached its maximum capacity. This project reaches the company’s required IRR of 10% with payoff taking 7 years which is two years higher than the required five. Project 4 development and roll out of snack foods. This proposal is to produce a new line of dried fruit products under the name. the total cost of the project is 27 million. this project meets the required IRR of 12% for new products but exceeds payoff time by one year. Project 5 plant automation and conveyer system. This project is to modernize the lines of six older plants. This suggestions falls under the efficiency sections and meets the efficiency hurdle coming in at 8.7%. it does not reach the payoff goal of 4 years. It should be categorized under safety, as it will reduce the amount if injuries. Project 6 Effluent water treatment at four plants. This project is an environmental project in response to legislation that requires all the plants to modernize their water purification systems to remove potential toxins before water. No test for this proposal. Project 7 and 8, market expansion southward and eastward. This project is to expand into the southern and eastern European markets. The cost will 56.3 million with the IRR’s Being the highest of any project at 21.4 and 18.8 payback figures are not clear but the regions do show promise. Project 9 development and introduction of new artificially sweetened yogurt and ice cream. This project will cost the company 27 million with an IRR of 20.5%. payback unknown but it looks very good. Project 10 networked control system. This proposal would cost 22.5 million initially, the IRR is acceptable at 16.2%. the update would be outdated within three years and require additional investment after that. Payoff is unknown. Project 11 acquisition of leading schnapps brand and its facilities. This project successfully meets the IRR and the payback goals. The expansion of truck fleet proposal would serve two primary purposes within the company. It would allow for greater efficiency in deliveries by expanding the total fleet bt 40 trucks and it would cut delivery times and allow greater flexibility for deliveries. This project will have no increase in the company’s profit, but it will reduce amount spent on delivery, which is helping pay of the debt sooner. Project 2 is the plant one and its request is to build a new plant in France to aid in production which has nearly reached its limit. The market is high in France and is shows signs of continuing growth, which means that a new factory would be very beneficial to the area. The plant is estimated to produce after tax cash flows of 35.6 million within the next ten years, which would drastically aid in reducing debt. Now I could go all day about the projects but I will get to the ranking. When ranking the projects I think the first one in the ranking order is strategic acquisition. The project has a high return of Eur 198.5 million, but the expenditure was high as well Eur55 million. the second one is southward expansion. The expenditure of this project is Eur30 million the project will generate about Eur 56.25 million in 10 years. The third one in the ranking is artificial sweetener or eastward expansion, the payback period and NPV in these two projects are almost the same. There is a 1.7% IRR difference between these two projects and the payback was the same in the 5 years. So either or. New plant would be 5 to me. Snack food would be six in the ranking. 7 would be expanded plant, well correction expand truck fleet and the expanded plant. 9 would be automation and conveyer systems and 10 would be inventory control system. If ranking the proposals a second time I’m going to look at the IRR solely and from the 1st rank. Strategic acquisition has the highest one with 27.5. second is southward expansion and right behind it is artificial sweetener. 4th is the eastward expansion having 18.8% IRR. 5 is inventory control system at 16.2. 6th is snack food being at 13.4%. 7th is new plant Dijon, France at 11.3% and right behind it at 8th is expanded plant which is 11.2%. 9 is automation and conveyer systems and last is expand truck fleet at 7.8% ranking lists shown that the project of Strategic Acquisition should be accept by the board directors, because it has a highest IRR and NPV, the second high Profitability Index and 5 years payback, although the initial investment is really big but still the return is worse to do. The total investment of this project will be EUR55 million. The second recommend project will be the project of Southward Expansion. This project has a high IRR and NPV, the initial investment is EUR30 million, it is the 3rd in the ranking list of Project Spending and it is the 2nd in the ranking list of Project Net Cash Flow about EUR56.25 million, The payback is 5 years too. Because the project of Effluent-Water Treatment at Four Plants is highly recommend so right now we have total capital budget EUR91 million. Based on all the ranking list, the project of the Artificial Sweetener will be the last recommendation for the new year capital budget. This project has the 3rd highest IRR and NPV, the return is the 4th in the list about EUR42.75 million and payback is also 5 years. They expenditure for this project is EUR27 million. So the total budget will be EUR118 million include Strategic Acquisition, Southward Expansion, Artificial Sweetener and Effluent-Water Treatment at Four Plants. These projects should be the ones Wilhemina verdin recommend to the board of euroland foods