plz answerr question 3 only

those are the questions before it, but i only need answer for question 3. dont report this request as multipe questions :) thank you

Question 3: There are many aspects that could invalidate the simple NPV analysis of the projects. They include: Risk Political considerations Regulatory issues including health, safety, and environmental Incompatibility with the corporate strategy Resource availability Impact on brand or corporate image Quality and certainty of the data used for analyzing the various projects Synergies between the projects Different analysis techniques and different assumptions can be used to correct for the various factors that affect each project differently. For example: The time value of money can be accounted for, by using discounting methods such as NPV or IRR. Unequal lifetimes of the projects can be accounted for by calculating the NPV to infinity or using Equivalent Annuities Risk can be accounted for at least financially) by increasing the hurdle rate. The different project sizes can be accounted for by multiplying the NPV by the ratio of the size of the projects or by using a profitability ratio. Reconsider the projects evaluation in terms of: (Answer to these questions) are any "must do" projects of the nonnumeric type? what elements of the projects might imply greater or lesser riskiness? might there be any synergies or conflicts between the projects? do any of the projects have non-quantitative benefits or costs that should be considered in an evaluation? CASE 69 A PAN-EUROPA FOODS S.A. C. Opitz and R. F. Bruner urly January, and the senior management com minee of Pan-Europa Foods was to meet to draw up the capital budget for the new year. Up for considera tion were 11 major pro Il major projects that totaled over 208 euros). Unfortunately, the board of directors be imposed a spending limit of only 80 million; even sa investment at that rate would represent a major mase in the firm's asset base of 656 million. Thus the challenge for the senior managers of Pan-Europa was to allocate funds among a range of compelling projects: w product introduction, acquisition, market expan. sion, efficiency improvements, preventive maintenance, safety, and pollution control. content, large chunks of chocolate, fruit, nuts, and wide range of original flavors. Recently, Pan-Europa sales had been statiese Exhibit 2), which management attributed to low popula. tion growth in northern Europe and market saturation in some areas. Outside observers, however, faulted recent failures in new product introductions. Most members of management wanted to expand the company's market presence and introduce more new products to boost sales. These managers hoped that increased market presence and sales would improve the company's market value. Pan-Europa's stock was currently at eight times carnings, just below book value. This price/earnings ratio was below the trading multiples of comparable companies, but it gave little value to the company's brands. The Company Pan-Europa Foods, headquartered in Brussels, Belgium, was a multinational producer of high-quality ice-cream. yogurt, bottled water, and fruit juices. Its products were sold throughout Scandinavia, Britain, Belgium, the Netherlands, Luxembourg, western Germany, and north- em France. (See Exhibit 1 for a map of the company's marketing region.) The company was founded in 1924 by Theo Verdin, a Belgian farmer, as an offshoot of his dairy business. Through keen attention to product development, and shewd marketing, the business grew steadily over the years. The company went public in 1979 and by 1993 was listed for trading on the London, Frankfurt, and Brussels exchanges. Last year Pan-Europa had sales of Resource Allocation The capital budget at Pan-Europa was prepared annually by a committee of senior managers who then presented it for approval by the board of directors. The committee consisted of five managing directors, the president direc- feur gnral (PDG), and the finance director. Typically, the PDG solicited investment proposals from the manag- ing directors. The proposals included a brief project description, a financial analysis, and a discussion of strategic or other qualitative considerations. As a matter of policy, investment proposals at Pan-Europa were subjected to two financial tests, pay- back and internal rate of return (IRR). The tests, or hurdles, had been established by the management com- mittee and varied according to the type of project: almost 1.1 billion. Minimum Acceptable Ice-cream accounted for 60 percent of the company's evenues; yogurt which was introduced in 1982, con- buled about 20 percent. The remaining 20 percent of es was divided equally between bottled water and fruit Pan-Europa's faship brand name was "Rolly. was represented by a fat, dancing bear in farmers cream, the company's leading product, had a al base of customers who wohl out its high buttertat Maximum Acceptable Payback Years IRR 6 years coing, Ice-cream. Type of Project . New product or new markets 2. Product or market extension 3. Efficiency improvements 4. Safety or environmental 125 10% 5 years No test No test S e d with permission Copyright Darden Graduate Business Foundation Charlesville, Virginia 70 WATER Z / STRATEGIC MANAGEMENT AND PROJECT SELECTION promir Memb cento execu Manas Londe Bas board shares Londe Euro relied years durin Now (led prog prep: curr rema R Exhibit! Pan-Europa Foods S. A. Nations Where Pan-Europa Competed Note: The shaded area in this map reveals the principal distribution region of Pan-Europa's products. Important facilities are indicated by the following figures: 1. Headquarters, Brussels, Belgium 6. Plant, Copenhagen, Denmark 2. Plant. Antwerp. Belgium 7. Plant, Svald, Sweden 3. Plant, Strasbourg, France 8. Plant, Nelly-on-Mersey, England 4. Plant, Nuremberg, Germany 9. Plant, Caen, France 5. Plant, Hamburg, Germany 10. Plant, Melun, France Pan mu Exhibit 2 Summary of Financial Results (all values in E millions except per-share amounts) trac Fiscal Years Ending December 31 hac we car Previous Year Last Yeer This Year The most recent estimated weighted average costa capital (WACC) for Pan-Europa was 10.5 percent describing the capital-budgeting process, the finance director, Trudi Lauf, said, "We use the sliding scale IRR tests as a way of recognizing differences in among the various types of projects. Where the compa takes more risk, we should earn more return. The pay test signals that we are not prepared to wait for long achieve that return." mi 1,076 51 0.75 1,072 49 0.72 1. The payback Geoss sales Net income Earnings per share Dividends Totalanes Shareholders' equity book ale) Shareholders' equity 1.074 37 0.54 20 656 235 400 229 Ownership and the Sentiment of Creditors and Investors Pan-Europa's 12-member board of directors in three members of the Verdin family, four memb management, and five outside directors who octors included our members of CASE 71 new shares of stock at this depressed price level is also unthinkable, as it would impose unacceptable dilution on your current shareholders. Your equity investors expect an improvement in performance. If that improvement is not forthcoming, or worse, if investors' hopes are dashed, your shares might fall into the hands of raiders like Carlo de Benedetti or the Flick brothers. prominent managers or public figures in northern Europe Members of the Verdin family combined owned 20 per ont of Pan-Europa's shares outstanding, and company csecutives owned 10 percent of the shares. Venus Asset Management, a mutual fund management company in London, held 12 percent. Banque du Bruges et des Pays Bas held 9 percent and had one representative on the hoard of directors. The remaining 49 percent of the firm's shares were widely held. The firm's shares traded in London, Brussels, and Frankfurt At a debt-to-equity ratio of 125 percent, Pan-Europa was leveraged much more highly than its peers in the European consumer-foods industry. Management had relied on debt financing significantly in the past few years to sustain the firm's capital spending and dividends during a period of price wars initiated by Pan-Europa. Now, with the price wars finished, Pan-Europa's bankers (led by Banque du Bruges) strongly urged an aggressive program of debt reduction. In any event, they were not prepared to finance increases in leverage beyond the current level. The president of Banque du Bruges had remarked at a recent board meeting. At the conclusion of the most recent meeting of the directors, the board voted unanimously to limit capital spending in the next year to 80 million Restoring some strength to the right-hand side of the balance sheet should now be a first priority. Any expansion of assets should be financed from the cash flow after debt amortization until the debt rabo returns to a more prudent level. If there are crucial investments that cannot be funded this way. then we should cut the dividend! Members of the Senior Management Committee The capital budget would be prepared by seven senior managers of Pan-Europa. For consideration, each project had to be sponsored by one of the managers present. Usually the decision process included a period of discussion followed by a vote on two to four alternative capital budgets. The various executives were well known to each other. Wilhelmina Verdin (Belgian), PDG, age 57. Grand- daughter of the founder and spokesperson on the board of directors for the Verdin family's interests. Worked for the company her entire career with significant experience in brand management. Elected "European Marketer of the Year" in 1982 for success- fully introducing low-fat yogurt and ice-cream, the first major roll-out of this type of product. Eager to position the company for long-term growth but cau- tious in the wake of recent difficulties. Trudi Law (Swiss), finance director, age 51. Hired from Nestl to modernize financial controls and sys- tems. Had been a vocal proponent of reducing lever- age on the balance sheet. Also had voiced the concerns and frustrations of stockholders. Heinz Klink (German), managing director for Distri- bution, age 49. Oversaw the transportation, warehous- ing, and order-fulfillment activities in the company. Spoilage, transport costs, stock-outs, and control sys- tems were perennial challenges. Maarten Leyden (Dutch), managing director for Pro- duction and Purchasing, age 59. Managed production operations at the company's 14 plants. Engineer by training. Tough negotiator, especially with unions and had suppressed the con At a price-to-carines ratio of eight times, shares of -Europa common stock were priced below the average pics of peer companies and the average multiples of companies on the exchanges where Pan-Europa was traded This was attributable to the recent price wars, which "ppressed the company's profitability, and to the known recent failure of the company to seize signifi- Market share with a new product line of flavored clal water. Since last year all of the major securities had been issuing recommendations to inves- -Europa shares. Venus Asset Management in had quietly accumulated shares during this penod, an the expectation of a turnaround in the firm's ace. At the most recent board meeting. the maging director of Venus gave a presentation houses had been los in Pan-Europa sham performance. Al which he said. Cutting the al a lack the dividend is unthinkable, as it would a lack of faith in your own future. Selling 'De Beneden of Milan and the Flick hrochers of Munich were leaders of prominent hostile takeover attempts in recent years. 72 CUPTER 2 STRATEGIC MANAGEMENT AND PROJECT SELECTION The Expenditure Proposals suppliers. A fanate about production-cost control. Hal voiced doubts about the sincerity of creditors' and investors' commitment to the firm, Morro (Italianmanaging director for Sales, age 45. Oversaw the field sales force of 250 representatives and planned changes in geo- graphical sales coverage. The most vocal proponent of rapid expansion on the senior management com- mittee. Saw several opportunities for ways to improve geographical positioning. Hired from Unilever to revitalize the sales organization, which he successfully accomplished. Fabienne Morin (French), managing director for Marketing, age 41. Responsible for marketing research, new product development, advertising, and, in general, brand management. The primary advocate of the recent price war, which, although financially difficult, realized solid gains in market share. Perceived a "window of opportunity for product and market expansion and tended to support growth-oriented projects. Nigel Humbolt (British), managing director for Stra- tegic Planning, age 47. Hired two years previously from a well-known consulting firm to set up a strategic planning staff for Pan-Europa. Known for asking difficult and challenging questions about Pan-Europa's core business, its maturity, and profit- ability. Supported initiatives aimed at growth and market share. Had presented the most aggressive proposals in 1992, none of which were accepted. Becoming frustrated with what he perceived to be his lack of influence in the organization. The forthcoming meeting would entertain the follo proposals (see summary table also): 1. Replacement and expansion of the truck fleet Klink proposed to purchase 100 new refriger tractor trailer trucks, 50 this year and anoth 50 next year. By doing so, the company could sell 60 old, fully depreciated trucks over the years for a total of 1.2 million. The purch would expand the fleet by 40 trucks within to years. Each of the new trailers would be larger than the old trailers and afford a 15 percent increase in cubic meters of goods hauled on each trip. Then tractors would also be more fuel and maintenance efficient. The increase in number of trucks would permit more flexible scheduling and more efficient routing and servicing of the fleet than at present and would cut delivery times and, therefore, pos- sibly inventories. It would also allow more fre quent deliveries to the company's major markets, which would reduce the loss of sales caused by stock-outs. Finally, expanding the fleet would support geographical expansion over the long term. As shown in Exhibit 3. the total net invest ment in trucks of 20 million and the increase in working capital to support added maintenance fuel, payroll, and inventories of 2 million expected to yield total cost savings and added sales potential of 7.7 million over the next seven years The resulting IRR was estimated to be 7.8 percent marginally below the minimum 8 percent required return on efficiency projects. Some of the manage Expenditure ( millions) Project 1. Replacement and expansion of the truck fleet 2. A new plant 3. Expansion of a plan 4. Development and introduction of new artificially sweetened yogurt and ice cream 5. Plant automation and conveyor systems 6. Effect water treatment at four plants 7. Market expansion castward & Market expansion southward 9. Development and roll out of snack foods 10. Networked, computer-based inventory control system for warehouses and field representatives 11. Acquisition of a leading schnapps brand and Sponsoring Manager Klink. Distribution Leyden, Production Leyden. Production Morin, Marketing Leyden, Production Leyden, Production Ponti, Sales Ponti, Sales Morin, Marketing Klink, Distribution Humbolt, Strategic Planning Exhib. Cash Flows Analysis oftp ed Project (all values in millions) New Plan xwe Plant Arnficial Swerwer Eastward Expansion (note 3) Cover Systems Southwand Expansion (notes) Control Strategie Argon ( ote 3) Imestment 25.00 5.00 10.00 2000 2.00 15.00 Working Capital 15.00 3.00 20.00 10.00 (1000) 1.25 (18.00) 15.00 14.00 20,00 20.00 EXPECTED FREE CASH FLOWS (note 4) (5.00) (14.00) (20.00) (20.00) (5.00) 3.50 3.00 (5.00) 3.00 400 (12.00) 5.50 (11.40) (7.80) 3.00 3.50 4.00 3.00 (0.00) 2.00 5.00 5.50 6.00 (15.00 (20.00) 5.00 2.75 11.00 2.00 2.25 2.50 4,00 5.50 5.00 13.00 6.50 6.75 5.00 15.00 6,00 5.00 5.00 6.50 5.50 6.00 5.25 5.50 17.00 19.00 21.00 7.50 8.00 5.00 5.00 5.00 7.00 7.70 23.75 7.25 22 50 3750 32.50 28.50 14 Undiscounted Sum Payback (years) Maximum Payback Accepted IRR Minimum Accepled ROR Spread NPV at Corp. WACC (10.3%) NPV at Minimum ROR Equivalent Annuity (note 2) 11.35 100% 1 6 18,8 12.05 28.7 1125 100 1.25 80E 7.85 8.05 -0.25 -1.92 -0.13 -0,02 8.0 173 12.05 539 5.21 3.88 0.69 21.45 12.05 9.45 11.99 9.90 20 12.07 8.55 -0.87 16.7% 4797 0.99 1.87 0.30 0.55 0.09 1.16 1.78 7.08 7.31 0.06 The eMuent treatment program is not included in this exhibit The equivalent annuity of a project is that level annual payment over 10 years that yields a nel present value equal to the NPV at the minimum required rate of return for that project. Annuity corrects for differences in duration among various projects. For instance, project 5 lasts only 7 years and has an NPV of 0.32 million a 10-year stream of annual cash flows of 0.05 million, discounted at 8.0 percent (the required rate of return) also yields an NPV of 0.32 million. In ranking projects on the basis of equivalent annuity, bigger annuities create more investor wealth than smaller annuities This reflects 11 million spent both initially and at the end of year 1. *Free cash flow = incremental profit or cost savings after taxes + depreciation - investment in fixed assets and working capital Franchisees would gradually take over the burden of carrying receivables and inventory. els million would be spent in the first year, 20 million in the second, and 5 million in the third. e produce 14 E STRATEGIC MANAGE AND PROJECT SELECTION wonder if this project would be more properly chwified as "ficiency than expansion," A plast Marten Leyden noted that Pas-Europa's yogurt and Recream sales in the theast region of the company's market were houl to exceed the capacity of its Melun, France, u facturing and packaging plant. At present, e of the demand was being met by shipments from the company's newest, most efficient facility, located in Strasbourg, France. Shipping costs over the distance were high, however, and some sales were undoubtedly being lost when the marketing effort could not be supported by delivery. Leyden proposed that a new manufacturing and packaging plant be built in Dijon, France, just at the current southern edge of Pan-Europa's marketing region, to take the burden of the Melun and Strasbourg plants. The cost of this plant would be 25 million and would entail es million for working capital. The E14 million worth of equipment would be amortized over seven years, and the plant over ten years. Through an increase in sales and depreciation, and the decrease in delivery costs, the plant was expected to yield after-tax cash flows totaling 23.75 million and an IRR of 11.3 percent over the next ten years. This project would be classified as a market extension. 3. Eyansion of a plant. In addition to the need for greater production capacity in Pan-Europa's south- castern region, its Nuremberg, Germany. plant had reached full capacity. This situation made the sched- uling of routine equipment maintenance difficult which in turn, created production scheduling and deadline problems. This plant was one of two highly automated facilities that produced Pan-Europa's entire line of bottled water, mineral water, and fruit juices. The Nuremberg plant supplied central and artificial sweeteners were showing promised nificant cost savings to food and beverage as well as stimulating growing demand for calorie products. The challenge was to create right flavor to complement or enhance the ingredients. For ice-cream manufacturers, the culty lay in creating a balance that would reseli same flavor as was obtained when using a sweeteners, artificial sweeteners might of create a superior taste, 15 million would be needed to commerciale yogurt line that had received promising results laboratory tests. This cost included acquiring spe cialized production facilities, working capital the cost of the initial product introduction. The overall IRR was estimated to be 17.3 percent. Morin stressed that the proposal, although highly uncertain in terms of actual results, could be viewed as a means of protecting present market shar, because other high-quality ice-cream producers car rying out the same research might introduce these products, if the Rolly brand did not carry an anti- cially sweetened line and its competitors did, the Rolly brand might suffer. Morin also noted the parallels between innovating with artificial sweet eners and the company's past success in introducing low-fat products. This project would be classed in the new product category of investments. 5. Plant automation and convor systems. Maarten Leyden also requested 14 million to increase a mation of the production lines at six of the company's older plants. The result would be improved through put speed and reduced accidents, spillage, and pro duction tie-ups. The last two plants the company built included conveyer systems that eliminated need for any heavy lifting by employees. The system reduced the chance of injury to employees at the older plants, the company had sustained an average 75 missed worker-days per year per plant in the two years because of muscle injuries sustained heavy lifting. At an average hourly wage of 1 per hour, over 150.000 per year was thus lost. the possibility always existed of more serious injure and lawsuits Overall cost savings and deprecia totaling 2.75 million per year for the project expected to yield an IRR of 8.7 percent. This pre would be classed in the efficiency category western Europe. The other plant, near Copenhagen, Denmark, supplied Pan-Europa's northern European markets.) The Nuremberg plant's capacity could be expanded by 20 percent for 10 million. The equip- men (7 million) would be depreciated over seven years, and the plant over ten years. The increased capacity was expected to result in additional pro- duction of up to 1.5 million per year, yielding an IRR of 11.2 percent. This project would be classified as a market extension Develop and introduction of a weed yogurt and ice-cream. Fabienne Morin noted that recent developments in the synthesis of 6. Efluent water treatment matment at four plants. Pas-Europe preprocessed a variety of fresh fruits at its MC and Strasbourg plants. One of the first stages CASE 75 Suthe p woulded to be supplied from plants in Melun, Strasbourg and Recen The initial cost of either proposal was 20 million of working capital. The bulk of this project's costs was expected to involve the financing of distributionship but over the ten year forecast period, the distributors would gradually take over the burden of carrying receivables and inventory. Both expansion proposals assumed the retail of the warehouse and distri sing involved cleaning the fruit to remove dirt B esticides. The dirty water was simply sent down rain and into the Seine or Rhine rivers Recent F an Community directives called for any waste containing even slight traces of poisonous chemicals to be treated at the sources and gave es four years to comply. As an environmen- oriented project, this proposal fell outside the mal financial tests of project attractiveness. Ley- den od however, that the water treatment equip could be purchased today for 64 million he speed that the same equipment would cost 10 m in four years when immediate conversion he mandatory. In the intervening time, the com py would run the risks that European Community re s would shorten the compliance time or that the company's pollution record would become public and impair the image of the company in the eyes of the consumer. This project would be classed in the environmental category. 1. and 8. Market expansions eastward and southward. Marco Ponti recommended that the company expand its market castward to include caster Germany, Poland, Crechoslovakia, and Austria andfor southward to include southern France, Switz- erland, Italy, and Spain. He believed the time was night to expand sales of ice-cream, and perhaps yogurt geographically. In theory, the company could sustain expansions in both directions simulta neously, but practically. Ponti doubted that the sales and distribution organizations could sustain both expected to focal 375 forstanden and 32.5 million for and expo Marco Ponti pointed out that eastward expansion meant a higher possible IRR but that moving south- ward was a less risky proposition. The projected IRRs were 21.4 percent and 18.8 percent for caster and southern expansion, respectively. These projects would be classed in the new market category. 9. Development and roll-ow of snack foods. Fabienne Morin suggested that the company use the excess capacity at its Antwerp spice and nut processing facility to produce a line of dried fruits to be test marketed in Belgium, Britain, and the Netherlands She noted the strength of the Rolly brand in those countries and the success of other food and beverage companies that had expanded into snack food pro- duction. She argued that Pan-Europa's reputation for wholesome, quality products would be enhanced by a line of dried fruits and that name association with the new product would probably even lead to increased sales of the company's other products among health conscious consumers Equipment and working-capital investments were expected to local 15 million and 3 million, respectively, for this project. The equipment would be depreciated over seven years. Assuming the test market was successful, cash flows from the project would be able to support further plant expansions in other strategic locations. The IRR was expected to be 20.5 percent, well above the required return of 12 percent for new product projects. 10, Newarked, computer based inwentory control sys tem for warehouses and field representatives, Heinz Klink had pressed for three years unsuccessfully for a state-of-the-art computer based inventory control system that would link field sales representatives, distributors, drivers, warehouses, and even possibly retailers. The benefits of such a wystem would be shortening delays in ordering and onder processing. better control of inventory, reduction of spoilage, Each alternative peopraphical expansion had its benefits and risks. If the company expanded cast a could reach a large population with a great petite for frozen dairy products, but it would also lace more competition from local and regional cam manufacturers. Moreover, consumers in caster Germany, Poland, and Crechoslovakia did not have the purchasing power that consumers did o the south. The catwand expansion would have to supplied from plants in Nuremberg, Strasbourg. Heure Looking southward, the tables were turned more purchasing power and less competition but also a maller consumer i te for ise cream and yogurt southward expansion would require building amer demand for premium quality yogurt and cam. Ir neither of the plant proposals de 76 CUPTER 2 / STRATEGIC MANAGEMENT AND PROJECT SELECTION and faster recognition of changes in demand at the customer level Klink was reluctant to quantify these benefits, because they could range between modest and quite large amounts. This year, for the first time, he presented a cash-flow forecast, however, that reflected an initial outlay of 12 million for the system, followed by 3 million in the next year for ancillary equipment. The inflows reflected depreciation tax shields, tax credits, cost reductions in warehousing, and reduced inventory. He fore- casted these benefits to last for only three years. Even so, the project's IRR was estimated to be 16.2 percent. This project would be classed in the efficiency category of proposals. 11. Acquisition of a leading schnapps brand and asso- ciated facilities, Nigel Humbolt had advocated mak- ing diversifying acquisitions in an effort to move beyond the company's mature core business but protection through branding. He had identif four small producers of well-established brands liqueurs as acquisition candidates. Follow exploratory talks with each, he had determin that only one company could be purchased in the near future, namely, the leading private Euro manufacturer of schnapps, located in Munich, The proposal was expensive: 15 million to buy the company and 25 million to renovate the com pany's facilities completely while simultaneously expanding distribution to new geographical mar kets. The expected returns were high: after-tar cash flows were projected to be 134 million yielding an IRR of 28.7 percent. This project would be classed in the new product category of proposal doing so in a way that exploited the company's skills in brand management. He had explored six possible related industries, in the general field of consumer packaged goods, and determined that cordials and liqueurs offered unusual opportunities for real growth and, at the same time, market Conclusion Each member of the management committee was expected to come to the meeting prepared to present and defend a proposal for the allocation of Pan-Europa capital budget of 80 million. Exhibit 3 summarizes the various projects in terms of their free cash flows and the investment-performance criteria. QUESTIONS might there be any synergies or conflicts between the projects? do any of the projects have no quantitative benefits of costs that should be considered in an evaluation 1. Strategically, what must Pan-Europa do to keep from becoming the victim of a hostile keer? What row weategories in Exhibit 2 will us become critically important this coming year? What should Pan-Europa do now that they have won the price war? Who should lead the way for Pan-Europa? 2. U NPV, conduct a che financial analysis of the investment alemanes and rank the projects, Which NPV of the three should be used? Why? Suggest a way to evaluate the effluent project 2. What aspects of the projects mightinvalidate the ranking you as derived How should we correct for each investment's eve o mocy unequallidetimes, 5. Considering all the above, what screen factors might you suggest to narrow down the set of most desirable projec What criteria would you use to evaluate the projects of these various factors? Do any of the projects fail to per these screens due to their extreme values on some of factors? 6. Divide the projects into the four project categories of derivative, platform, breakthrough and R&D. Draw an aggregate project plan and array the projects on the chart. 7. Based on all the above, which projects should the management committee recommend to the Board of 4. Reconsider the projects in terms of anys de projects of the monnumeric type? h ements of the projects might imply greater or Directions? des c om p ly The difference between this ama this amount and the 40 million requested Case: Pan-Europa Food SA. (page 69-76) Each of you should present the company/case (2-3 slides) and should answer to the following questions. Question 1: Strategically, what must Pan-Europa do to keep from becoming the victim of a hostile takeover? What rows/categories in Exhibit 2 will thus become critically important this coming year? 2. Question 2: Using NPV, conduct a straight financial analysis of the investment alternatives and rank the projects. Suggest a way to evaluate the effluent project. 3. Question 3: There are many aspects that could invalidate the simple NPV analysis of the projects. They include: 1) Risk 2) Political considerations 3) Regulatory issues including health, safety, and environmental 4) Incompatibility with the corporate strategy 5) Resource availability Impact on brand or corporate image 7) Quality and certainty of the data used for analyzing the various projects 8) Synergies between the projects Different analysis techniques and different assumptions can be used to correct for the various factors that affect cach project differently. For example: The time value of money can be accounted for, by using discounting methods such as NPV or IRR. . Unequal lifetimes of the projects can be accounted for by calculating the NPV to infinity or using Equivalent Annuities. Risk can be accounted for at least financially) by increasing the hurdle rate. The different project sizes can be accounted for by multiplying the NPV by the ratio of the size of the projects or by using a profitability ratio. Reconsider the projects evaluation in terms of: (Answer to these questions) are any "must do" projects of the nonnumeric type? . what elements of the projects might imply greater or lesser riskiness? might there be any synergies or conflicts between the projects? . do any of the projects have non-quantitative benefits or costs that should be considered in an evaluation? Question 3: There are many aspects that could invalidate the simple NPV analysis of the projects. They include: Risk Political considerations Regulatory issues including health, safety, and environmental Incompatibility with the corporate strategy Resource availability Impact on brand or corporate image Quality and certainty of the data used for analyzing the various projects Synergies between the projects Different analysis techniques and different assumptions can be used to correct for the various factors that affect each project differently. For example: The time value of money can be accounted for, by using discounting methods such as NPV or IRR. Unequal lifetimes of the projects can be accounted for by calculating the NPV to infinity or using Equivalent Annuities Risk can be accounted for at least financially) by increasing the hurdle rate. The different project sizes can be accounted for by multiplying the NPV by the ratio of the size of the projects or by using a profitability ratio. Reconsider the projects evaluation in terms of: (Answer to these questions) are any "must do" projects of the nonnumeric type? what elements of the projects might imply greater or lesser riskiness? might there be any synergies or conflicts between the projects? do any of the projects have non-quantitative benefits or costs that should be considered in an evaluation? CASE 69 A PAN-EUROPA FOODS S.A. C. Opitz and R. F. Bruner urly January, and the senior management com minee of Pan-Europa Foods was to meet to draw up the capital budget for the new year. Up for considera tion were 11 major pro Il major projects that totaled over 208 euros). Unfortunately, the board of directors be imposed a spending limit of only 80 million; even sa investment at that rate would represent a major mase in the firm's asset base of 656 million. Thus the challenge for the senior managers of Pan-Europa was to allocate funds among a range of compelling projects: w product introduction, acquisition, market expan. sion, efficiency improvements, preventive maintenance, safety, and pollution control. content, large chunks of chocolate, fruit, nuts, and wide range of original flavors. Recently, Pan-Europa sales had been statiese Exhibit 2), which management attributed to low popula. tion growth in northern Europe and market saturation in some areas. Outside observers, however, faulted recent failures in new product introductions. Most members of management wanted to expand the company's market presence and introduce more new products to boost sales. These managers hoped that increased market presence and sales would improve the company's market value. Pan-Europa's stock was currently at eight times carnings, just below book value. This price/earnings ratio was below the trading multiples of comparable companies, but it gave little value to the company's brands. The Company Pan-Europa Foods, headquartered in Brussels, Belgium, was a multinational producer of high-quality ice-cream. yogurt, bottled water, and fruit juices. Its products were sold throughout Scandinavia, Britain, Belgium, the Netherlands, Luxembourg, western Germany, and north- em France. (See Exhibit 1 for a map of the company's marketing region.) The company was founded in 1924 by Theo Verdin, a Belgian farmer, as an offshoot of his dairy business. Through keen attention to product development, and shewd marketing, the business grew steadily over the years. The company went public in 1979 and by 1993 was listed for trading on the London, Frankfurt, and Brussels exchanges. Last year Pan-Europa had sales of Resource Allocation The capital budget at Pan-Europa was prepared annually by a committee of senior managers who then presented it for approval by the board of directors. The committee consisted of five managing directors, the president direc- feur gnral (PDG), and the finance director. Typically, the PDG solicited investment proposals from the manag- ing directors. The proposals included a brief project description, a financial analysis, and a discussion of strategic or other qualitative considerations. As a matter of policy, investment proposals at Pan-Europa were subjected to two financial tests, pay- back and internal rate of return (IRR). The tests, or hurdles, had been established by the management com- mittee and varied according to the type of project: almost 1.1 billion. Minimum Acceptable Ice-cream accounted for 60 percent of the company's evenues; yogurt which was introduced in 1982, con- buled about 20 percent. The remaining 20 percent of es was divided equally between bottled water and fruit Pan-Europa's faship brand name was "Rolly. was represented by a fat, dancing bear in farmers cream, the company's leading product, had a al base of customers who wohl out its high buttertat Maximum Acceptable Payback Years IRR 6 years coing, Ice-cream. Type of Project . New product or new markets 2. Product or market extension 3. Efficiency improvements 4. Safety or environmental 125 10% 5 years No test No test S e d with permission Copyright Darden Graduate Business Foundation Charlesville, Virginia 70 WATER Z / STRATEGIC MANAGEMENT AND PROJECT SELECTION promir Memb cento execu Manas Londe Bas board shares Londe Euro relied years durin Now (led prog prep: curr rema R Exhibit! Pan-Europa Foods S. A. Nations Where Pan-Europa Competed Note: The shaded area in this map reveals the principal distribution region of Pan-Europa's products. Important facilities are indicated by the following figures: 1. Headquarters, Brussels, Belgium 6. Plant, Copenhagen, Denmark 2. Plant. Antwerp. Belgium 7. Plant, Svald, Sweden 3. Plant, Strasbourg, France 8. Plant, Nelly-on-Mersey, England 4. Plant, Nuremberg, Germany 9. Plant, Caen, France 5. Plant, Hamburg, Germany 10. Plant, Melun, France Pan mu Exhibit 2 Summary of Financial Results (all values in E millions except per-share amounts) trac Fiscal Years Ending December 31 hac we car Previous Year Last Yeer This Year The most recent estimated weighted average costa capital (WACC) for Pan-Europa was 10.5 percent describing the capital-budgeting process, the finance director, Trudi Lauf, said, "We use the sliding scale IRR tests as a way of recognizing differences in among the various types of projects. Where the compa takes more risk, we should earn more return. The pay test signals that we are not prepared to wait for long achieve that return." mi 1,076 51 0.75 1,072 49 0.72 1. The payback Geoss sales Net income Earnings per share Dividends Totalanes Shareholders' equity book ale) Shareholders' equity 1.074 37 0.54 20 656 235 400 229 Ownership and the Sentiment of Creditors and Investors Pan-Europa's 12-member board of directors in three members of the Verdin family, four memb management, and five outside directors who octors included our members of CASE 71 new shares of stock at this depressed price level is also unthinkable, as it would impose unacceptable dilution on your current shareholders. Your equity investors expect an improvement in performance. If that improvement is not forthcoming, or worse, if investors' hopes are dashed, your shares might fall into the hands of raiders like Carlo de Benedetti or the Flick brothers. prominent managers or public figures in northern Europe Members of the Verdin family combined owned 20 per ont of Pan-Europa's shares outstanding, and company csecutives owned 10 percent of the shares. Venus Asset Management, a mutual fund management company in London, held 12 percent. Banque du Bruges et des Pays Bas held 9 percent and had one representative on the hoard of directors. The remaining 49 percent of the firm's shares were widely held. The firm's shares traded in London, Brussels, and Frankfurt At a debt-to-equity ratio of 125 percent, Pan-Europa was leveraged much more highly than its peers in the European consumer-foods industry. Management had relied on debt financing significantly in the past few years to sustain the firm's capital spending and dividends during a period of price wars initiated by Pan-Europa. Now, with the price wars finished, Pan-Europa's bankers (led by Banque du Bruges) strongly urged an aggressive program of debt reduction. In any event, they were not prepared to finance increases in leverage beyond the current level. The president of Banque du Bruges had remarked at a recent board meeting. At the conclusion of the most recent meeting of the directors, the board voted unanimously to limit capital spending in the next year to 80 million Restoring some strength to the right-hand side of the balance sheet should now be a first priority. Any expansion of assets should be financed from the cash flow after debt amortization until the debt rabo returns to a more prudent level. If there are crucial investments that cannot be funded this way. then we should cut the dividend! Members of the Senior Management Committee The capital budget would be prepared by seven senior managers of Pan-Europa. For consideration, each project had to be sponsored by one of the managers present. Usually the decision process included a period of discussion followed by a vote on two to four alternative capital budgets. The various executives were well known to each other. Wilhelmina Verdin (Belgian), PDG, age 57. Grand- daughter of the founder and spokesperson on the board of directors for the Verdin family's interests. Worked for the company her entire career with significant experience in brand management. Elected "European Marketer of the Year" in 1982 for success- fully introducing low-fat yogurt and ice-cream, the first major roll-out of this type of product. Eager to position the company for long-term growth but cau- tious in the wake of recent difficulties. Trudi Law (Swiss), finance director, age 51. Hired from Nestl to modernize financial controls and sys- tems. Had been a vocal proponent of reducing lever- age on the balance sheet. Also had voiced the concerns and frustrations of stockholders. Heinz Klink (German), managing director for Distri- bution, age 49. Oversaw the transportation, warehous- ing, and order-fulfillment activities in the company. Spoilage, transport costs, stock-outs, and control sys- tems were perennial challenges. Maarten Leyden (Dutch), managing director for Pro- duction and Purchasing, age 59. Managed production operations at the company's 14 plants. Engineer by training. Tough negotiator, especially with unions and had suppressed the con At a price-to-carines ratio of eight times, shares of -Europa common stock were priced below the average pics of peer companies and the average multiples of companies on the exchanges where Pan-Europa was traded This was attributable to the recent price wars, which "ppressed the company's profitability, and to the known recent failure of the company to seize signifi- Market share with a new product line of flavored clal water. Since last year all of the major securities had been issuing recommendations to inves- -Europa shares. Venus Asset Management in had quietly accumulated shares during this penod, an the expectation of a turnaround in the firm's ace. At the most recent board meeting. the maging director of Venus gave a presentation houses had been los in Pan-Europa sham performance. Al which he said. Cutting the al a lack the dividend is unthinkable, as it would a lack of faith in your own future. Selling 'De Beneden of Milan and the Flick hrochers of Munich were leaders of prominent hostile takeover attempts in recent years. 72 CUPTER 2 STRATEGIC MANAGEMENT AND PROJECT SELECTION The Expenditure Proposals suppliers. A fanate about production-cost control. Hal voiced doubts about the sincerity of creditors' and investors' commitment to the firm, Morro (Italianmanaging director for Sales, age 45. Oversaw the field sales force of 250 representatives and planned changes in geo- graphical sales coverage. The most vocal proponent of rapid expansion on the senior management com- mittee. Saw several opportunities for ways to improve geographical positioning. Hired from Unilever to revitalize the sales organization, which he successfully accomplished. Fabienne Morin (French), managing director for Marketing, age 41. Responsible for marketing research, new product development, advertising, and, in general, brand management. The primary advocate of the recent price war, which, although financially difficult, realized solid gains in market share. Perceived a "window of opportunity for product and market expansion and tended to support growth-oriented projects. Nigel Humbolt (British), managing director for Stra- tegic Planning, age 47. Hired two years previously from a well-known consulting firm to set up a strategic planning staff for Pan-Europa. Known for asking difficult and challenging questions about Pan-Europa's core business, its maturity, and profit- ability. Supported initiatives aimed at growth and market share. Had presented the most aggressive proposals in 1992, none of which were accepted. Becoming frustrated with what he perceived to be his lack of influence in the organization. The forthcoming meeting would entertain the follo proposals (see summary table also): 1. Replacement and expansion of the truck fleet Klink proposed to purchase 100 new refriger tractor trailer trucks, 50 this year and anoth 50 next year. By doing so, the company could sell 60 old, fully depreciated trucks over the years for a total of 1.2 million. The purch would expand the fleet by 40 trucks within to years. Each of the new trailers would be larger than the old trailers and afford a 15 percent increase in cubic meters of goods hauled on each trip. Then tractors would also be more fuel and maintenance efficient. The increase in number of trucks would permit more flexible scheduling and more efficient routing and servicing of the fleet than at present and would cut delivery times and, therefore, pos- sibly inventories. It would also allow more fre quent deliveries to the company's major markets, which would reduce the loss of sales caused by stock-outs. Finally, expanding the fleet would support geographical expansion over the long term. As shown in Exhibit 3. the total net invest ment in trucks of 20 million and the increase in working capital to support added maintenance fuel, payroll, and inventories of 2 million expected to yield total cost savings and added sales potential of 7.7 million over the next seven years The resulting IRR was estimated to be 7.8 percent marginally below the minimum 8 percent required return on efficiency projects. Some of the manage Expenditure ( millions) Project 1. Replacement and expansion of the truck fleet 2. A new plant 3. Expansion of a plan 4. Development and introduction of new artificially sweetened yogurt and ice cream 5. Plant automation and conveyor systems 6. Effect water treatment at four plants 7. Market expansion castward & Market expansion southward 9. Development and roll out of snack foods 10. Networked, computer-based inventory control system for warehouses and field representatives 11. Acquisition of a leading schnapps brand and Sponsoring Manager Klink. Distribution Leyden, Production Leyden. Production Morin, Marketing Leyden, Production Leyden, Production Ponti, Sales Ponti, Sales Morin, Marketing Klink, Distribution Humbolt, Strategic Planning Exhib. Cash Flows Analysis oftp ed Project (all values in millions) New Plan xwe Plant Arnficial Swerwer Eastward Expansion (note 3) Cover Systems Southwand Expansion (notes) Control Strategie Argon ( ote 3) Imestment 25.00 5.00 10.00 2000 2.00 15.00 Working Capital 15.00 3.00 20.00 10.00 (1000) 1.25 (18.00) 15.00 14.00 20,00 20.00 EXPECTED FREE CASH FLOWS (note 4) (5.00) (14.00) (20.00) (20.00) (5.00) 3.50 3.00 (5.00) 3.00 400 (12.00) 5.50 (11.40) (7.80) 3.00 3.50 4.00 3.00 (0.00) 2.00 5.00 5.50 6.00 (15.00 (20.00) 5.00 2.75 11.00 2.00 2.25 2.50 4,00 5.50 5.00 13.00 6.50 6.75 5.00 15.00 6,00 5.00 5.00 6.50 5.50 6.00 5.25 5.50 17.00 19.00 21.00 7.50 8.00 5.00 5.00 5.00 7.00 7.70 23.75 7.25 22 50 3750 32.50 28.50 14 Undiscounted Sum Payback (years) Maximum Payback Accepted IRR Minimum Accepled ROR Spread NPV at Corp. WACC (10.3%) NPV at Minimum ROR Equivalent Annuity (note 2) 11.35 100% 1 6 18,8 12.05 28.7 1125 100 1.25 80E 7.85 8.05 -0.25 -1.92 -0.13 -0,02 8.0 173 12.05 539 5.21 3.88 0.69 21.45 12.05 9.45 11.99 9.90 20 12.07 8.55 -0.87 16.7% 4797 0.99 1.87 0.30 0.55 0.09 1.16 1.78 7.08 7.31 0.06 The eMuent treatment program is not included in this exhibit The equivalent annuity of a project is that level annual payment over 10 years that yields a nel present value equal to the NPV at the minimum required rate of return for that project. Annuity corrects for differences in duration among various projects. For instance, project 5 lasts only 7 years and has an NPV of 0.32 million a 10-year stream of annual cash flows of 0.05 million, discounted at 8.0 percent (the required rate of return) also yields an NPV of 0.32 million. In ranking projects on the basis of equivalent annuity, bigger annuities create more investor wealth than smaller annuities This reflects 11 million spent both initially and at the end of year 1. *Free cash flow = incremental profit or cost savings after taxes + depreciation - investment in fixed assets and working capital Franchisees would gradually take over the burden of carrying receivables and inventory. els million would be spent in the first year, 20 million in the second, and 5 million in the third. e produce 14 E STRATEGIC MANAGE AND PROJECT SELECTION wonder if this project would be more properly chwified as "ficiency than expansion," A plast Marten Leyden noted that Pas-Europa's yogurt and Recream sales in the theast region of the company's market were houl to exceed the capacity of its Melun, France, u facturing and packaging plant. At present, e of the demand was being met by shipments from the company's newest, most efficient facility, located in Strasbourg, France. Shipping costs over the distance were high, however, and some sales were undoubtedly being lost when the marketing effort could not be supported by delivery. Leyden proposed that a new manufacturing and packaging plant be built in Dijon, France, just at the current southern edge of Pan-Europa's marketing region, to take the burden of the Melun and Strasbourg plants. The cost of this plant would be 25 million and would entail es million for working capital. The E14 million worth of equipment would be amortized over seven years, and the plant over ten years. Through an increase in sales and depreciation, and the decrease in delivery costs, the plant was expected to yield after-tax cash flows totaling 23.75 million and an IRR of 11.3 percent over the next ten years. This project would be classified as a market extension. 3. Eyansion of a plant. In addition to the need for greater production capacity in Pan-Europa's south- castern region, its Nuremberg, Germany. plant had reached full capacity. This situation made the sched- uling of routine equipment maintenance difficult which in turn, created production scheduling and deadline problems. This plant was one of two highly automated facilities that produced Pan-Europa's entire line of bottled water, mineral water, and fruit juices. The Nuremberg plant supplied central and artificial sweeteners were showing promised nificant cost savings to food and beverage as well as stimulating growing demand for calorie products. The challenge was to create right flavor to complement or enhance the ingredients. For ice-cream manufacturers, the culty lay in creating a balance that would reseli same flavor as was obtained when using a sweeteners, artificial sweeteners might of create a superior taste, 15 million would be needed to commerciale yogurt line that had received promising results laboratory tests. This cost included acquiring spe cialized production facilities, working capital the cost of the initial product introduction. The overall IRR was estimated to be 17.3 percent. Morin stressed that the proposal, although highly uncertain in terms of actual results, could be viewed as a means of protecting present market shar, because other high-quality ice-cream producers car rying out the same research might introduce these products, if the Rolly brand did not carry an anti- cially sweetened line and its competitors did, the Rolly brand might suffer. Morin also noted the parallels between innovating with artificial sweet eners and the company's past success in introducing low-fat products. This project would be classed in the new product category of investments. 5. Plant automation and convor systems. Maarten Leyden also requested 14 million to increase a mation of the production lines at six of the company's older plants. The result would be improved through put speed and reduced accidents, spillage, and pro duction tie-ups. The last two plants the company built included conveyer systems that eliminated need for any heavy lifting by employees. The system reduced the chance of injury to employees at the older plants, the company had sustained an average 75 missed worker-days per year per plant in the two years because of muscle injuries sustained heavy lifting. At an average hourly wage of 1 per hour, over 150.000 per year was thus lost. the possibility always existed of more serious injure and lawsuits Overall cost savings and deprecia totaling 2.75 million per year for the project expected to yield an IRR of 8.7 percent. This pre would be classed in the efficiency category western Europe. The other plant, near Copenhagen, Denmark, supplied Pan-Europa's northern European markets.) The Nuremberg plant's capacity could be expanded by 20 percent for 10 million. The equip- men (7 million) would be depreciated over seven years, and the plant over ten years. The increased capacity was expected to result in additional pro- duction of up to 1.5 million per year, yielding an IRR of 11.2 percent. This project would be classified as a market extension Develop and introduction of a weed yogurt and ice-cream. Fabienne Morin noted that recent developments in the synthesis of 6. Efluent water treatment matment at four plants. Pas-Europe preprocessed a variety of fresh fruits at its MC and Strasbourg plants. One of the first stages CASE 75 Suthe p woulded to be supplied from plants in Melun, Strasbourg and Recen The initial cost of either proposal was 20 million of working capital. The bulk of this project's costs was expected to involve the financing of distributionship but over the ten year forecast period, the distributors would gradually take over the burden of carrying receivables and inventory. Both expansion proposals assumed the retail of the warehouse and distri sing involved cleaning the fruit to remove dirt B esticides. The dirty water was simply sent down rain and into the Seine or Rhine rivers Recent F an Community directives called for any waste containing even slight traces of poisonous chemicals to be treated at the sources and gave es four years to comply. As an environmen- oriented project, this proposal fell outside the mal financial tests of project attractiveness. Ley- den od however, that the water treatment equip could be purchased today for 64 million he speed that the same equipment would cost 10 m in four years when immediate conversion he mandatory. In the intervening time, the com py would run the risks that European Community re s would shorten the compliance time or that the company's pollution record would become public and impair the image of the company in the eyes of the consumer. This project would be classed in the environmental category. 1. and 8. Market expansions eastward and southward. Marco Ponti recommended that the company expand its market castward to include caster Germany, Poland, Crechoslovakia, and Austria andfor southward to include southern France, Switz- erland, Italy, and Spain. He believed the time was night to expand sales of ice-cream, and perhaps yogurt geographically. In theory, the company could sustain expansions in both directions simulta neously, but practically. Ponti doubted that the sales and distribution organizations could sustain both expected to focal 375 forstanden and 32.5 million for and expo Marco Ponti pointed out that eastward expansion meant a higher possible IRR but that moving south- ward was a less risky proposition. The projected IRRs were 21.4 percent and 18.8 percent for caster and southern expansion, respectively. These projects would be classed in the new market category. 9. Development and roll-ow of snack foods. Fabienne Morin suggested that the company use the excess capacity at its Antwerp spice and nut processing facility to produce a line of dried fruits to be test marketed in Belgium, Britain, and the Netherlands She noted the strength of the Rolly brand in those countries and the success of other food and beverage companies that had expanded into snack food pro- duction. She argued that Pan-Europa's reputation for wholesome, quality products would be enhanced by a line of dried fruits and that name association with the new product would probably even lead to increased sales of the company's other products among health conscious consumers Equipment and working-capital investments were expected to local 15 million and 3 million, respectively, for this project. The equipment would be depreciated over seven years. Assuming the test market was successful, cash flows from the project would be able to support further plant expansions in other strategic locations. The IRR was expected to be 20.5 percent, well above the required return of 12 percent for new product projects. 10, Newarked, computer based inwentory control sys tem for warehouses and field representatives, Heinz Klink had pressed for three years unsuccessfully for a state-of-the-art computer based inventory control system that would link field sales representatives, distributors, drivers, warehouses, and even possibly retailers. The benefits of such a wystem would be shortening delays in ordering and onder processing. better control of inventory, reduction of spoilage, Each alternative peopraphical expansion had its benefits and risks. If the company expanded cast a could reach a large population with a great petite for frozen dairy products, but it would also lace more competition from local and regional cam manufacturers. Moreover, consumers in caster Germany, Poland, and Crechoslovakia did not have the purchasing power that consumers did o the south. The catwand expansion would have to supplied from plants in Nuremberg, Strasbourg. Heure Looking southward, the tables were turned more purchasing power and less competition but also a maller consumer i te for ise cream and yogurt southward expansion would require building amer demand for premium quality yogurt and cam. Ir neither of the plant proposals de 76 CUPTER 2 / STRATEGIC MANAGEMENT AND PROJECT SELECTION and faster recognition of changes in demand at the customer level Klink was reluctant to quantify these benefits, because they could range between modest and quite large amounts. This year, for the first time, he presented a cash-flow forecast, however, that reflected an initial outlay of 12 million for the system, followed by 3 million in the next year for ancillary equipment. The inflows reflected depreciation tax shields, tax credits, cost reductions in warehousing, and reduced inventory. He fore- casted these benefits to last for only three years. Even so, the project's IRR was estimated to be 16.2 percent. This project would be classed in the efficiency category of proposals. 11. Acquisition of a leading schnapps brand and asso- ciated facilities, Nigel Humbolt had advocated mak- ing diversifying acquisitions in an effort to move beyond the company's mature core business but protection through branding. He had identif four small producers of well-established brands liqueurs as acquisition candidates. Follow exploratory talks with each, he had determin that only one company could be purchased in the near future, namely, the leading private Euro manufacturer of schnapps, located in Munich, The proposal was expensive: 15 million to buy the company and 25 million to renovate the com pany's facilities completely while simultaneously expanding distribution to new geographical mar kets. The expected returns were high: after-tar cash flows were projected to be 134 million yielding an IRR of 28.7 percent. This project would be classed in the new product category of proposal doing so in a way that exploited the company's skills in brand management. He had explored six possible related industries, in the general field of consumer packaged goods, and determined that cordials and liqueurs offered unusual opportunities for real growth and, at the same time, market Conclusion Each member of the management committee was expected to come to the meeting prepared to present and defend a proposal for the allocation of Pan-Europa capital budget of 80 million. Exhibit 3 summarizes the various projects in terms of their free cash flows and the investment-performance criteria. QUESTIONS might there be any synergies or conflicts between the projects? do any of the projects have no quantitative benefits of costs that should be considered in an evaluation 1. Strategically, what must Pan-Europa do to keep from becoming the victim of a hostile keer? What row weategories in Exhibit 2 will us become critically important this coming year? What should Pan-Europa do now that they have won the price war? Who should lead the way for Pan-Europa? 2. U NPV, conduct a che financial analysis of the investment alemanes and rank the projects, Which NPV of the three should be used? Why? Suggest a way to evaluate the effluent project 2. What aspects of the projects mightinvalidate the ranking you as derived How should we correct for each investment's eve o mocy unequallidetimes, 5. Considering all the above, what screen factors might you suggest to narrow down the set of most desirable projec What criteria would you use to evaluate the projects of these various factors? Do any of the projects fail to per these screens due to their extreme values on some of factors? 6. Divide the projects into the four project categories of derivative, platform, breakthrough and R&D. Draw an aggregate project plan and array the projects on the chart. 7. Based on all the above, which projects should the management committee recommend to the Board of 4. Reconsider the projects in terms of anys de projects of the monnumeric type? h ements of the projects might imply greater or Directions? des c om p ly The difference between this ama this amount and the 40 million r