Part A

It seems that decisions had to be made ahead of schedule.

Danone sales had been falling without any measure working. From the headquarters, all the projects reported by the business units were required to provide a minimum return of 12% as well as a recovery of the investment of 4 years.

It seemed that everything had already been done so Pere met with the board of directors to update information about their proposals.

It was a gray day, and locked in the 8th floor, they began to present their ideas:

Martha, director of Marketing:

We have paid the consulting firm ABC COnsulting, about 15,000 to carry out a market study, the result indicates that we have to introduce 2 products on the market.

By now we have called them Alpha and Beta. The problem is that the two products cannot go to the market simultaneously. Alpha's sales forecast is quite interesting (you will find the data in Annex 1) but it will also help us boost on the projected sales of other products by 2% in case Alpha goes on and, 1,5% if Beta is selected.

Both products will be produced at the Parets plant, and it does not imply to cut production of the rest of products that are being produced there.

But we need cash to start these projects. The following investment is needed:

	Investment	Working capital (annual)
Alpha	2.100.000	75.000
Beta	1.500.000	60.000

We will recover the Working capital at the end of each project and we are paying 34% of corporate taxes.

Both investments will be depreciated in straight-line to zero over its four-year tax life, after which it will be worthless. Additionally, the operating costs of each product are: for Alpha: 12,5% of sales and for Beta: 8% of sales. For both projects we have fixed costs of 50.000.

Ok, said Pere, show me the numbers and lets make a decision about this alternatives. Remember! Our investors are requiring a 12% and recovering the investment before 4 years!

Your answer:

Part B

What??? Said Jordi, Finance Director of the company. What do you mean by that investment? You are all aware that there is no money!!!

Yes, we are aware, said Pere, but, if this projects go well, we will ensure a raise our sales! Well, one of these projects, not both but, what options do we have?

The only alternative is to get cash from the building we have close to the Sagrada Familia. This building was bought 10 years ago for 2.500.000 and now worth 3.500.000. You should know that this building was financed by paying 10% down for 30 years in quarter payments at an annual interest rate of 9,5%.

Our bank will finance only 80% of the new value over 25 years but now with monthly payments. They offer to keep the same annual rate of 9,5%. Do you think that we can get some cash from this alternative? Are we able to use this alternative to full finance the best project?

Your Answer: