INTRODUCTION
Euro land food is profound multinational company and a Premark producer of yogurt, icecream, bottled water and juice .The Company is basely head quarter in Brussels, Belgium. The company was formed in 1924 by the verdin after efficient marketing the company went public in 1979 and by the end of 1993 is camed on the market exchange of Frankfurt ,brussel and London and by picking its market share it had hit a sale record of 1.6 million by 2000 .
Companies entirely product revenue are generated by it three main products of which ice cream
covers up by 60%, yogurt contributed 20% and the remaining 20% is equally divided in to water and juices.
RESOURCE ALLOCATION OF EUROLAND
The final capital budgeting of euro land foods is proposed by the top committee of senior five Managing directors, Director General and Finance Director.
A: By examining the structure there are in total of eleven different projects set to be consider of total worth 316 million euro but the limited capital restrain of 120 million euro the company can select of limited project which can be verifiably analyzed and selected by different capital technique methods ,further more the proposed strategies are discussed as
Financial analysis
Discussion of strategies
Qualitative consideration
CAPITAL TECHNIQUE AND METHODS USED BY THE COMPANY
As a policy of investment proposal the company is used two major techniques.
IRR
PAYBACK
TOTAL CAPITAL FOR THE PROJECT
A considerable amount of euro 120 million are allocated for the fiscal year by the company for investment on different project.
OWNERSHIP OF THE EUROLAND FOOD COMPANY
The company have an on round twelve member board of director's .the ownership of the company is divided as follow.
Verdin famly : 20%
Companies executive : 10%
Venus asset management :12%
Bnque du Bruges Et Des Pays Bas : 9%
RATIOS
Debt to equity 125%
(Mostly leveraged)
Price-to-Earning 14 times
DEPARTMENATLIZATION
Euro land foods is divided into different segments and departments for operational structalization and implementation like marketing, production and selling
PROJECTS
DEPARTMENTS
1
Acquisition of a leading schnapps brand and facilities (Project 11)
Strategic planning
2
Development and Introduction of new artificially sweetened yogurt and ice cream(project 9)
Marketing
3
Networked, Computer-based inventory-control system for warehouses and field representatives(project 10)
Distribution
4
Effluent water treatment at four plants ( Project 6)
Production
5
Replacement and expansion of the truck fleet(project 1)
Distribution
6
A new plant(project 2)
Production
7
Market expansion eastward(project 8)
Sales
8
Market expansion southward(project 7)
Sales
9
Plant automation and conveyor systems(project 5)
Production
10
Expansion of a plant(project 3)
Production
11
Development and rollout of snack foods (project 4)
Marketing
SELECTION AND RANKING OF PROJECT
Ranking Project Description Expenditure Result
1
Acquisition of a leading schnapps brand and facilities (Project 11)
60.0
Accepted
2
Development and Introduction of new artificially sweetened yogurt and ice cream(project 9)
27.0
Accepted
3
Networked, Computer-based inventory-control system for warehouses and field representatives(project 10)
22.5
Accepted
4
Effluent water treatment at four plants ( Project 6)
6.0
Accepted
5
Replacement and expansion of the truck fleet(project 1)
33.0
Rejected
6
A new plant(project 2)
45.0
Rejected
7
Market expansion eastward(project 8)
30.0
Rejected
8
Market expansion southward(project 7)
30.0
Rejected
9
Plant automation and conveyor systems(project 5)
21.0
Rejected
10
Expansion of a plant(project 3)
15.0
Rejected
11
Development and rollout of snack foods (project 4)
27.0
Rejected
Graphical Representation of the projects capital invested
EXCEPTANCE AND REJECTION OF THE PROJECT
SECTION B
Definitions
IRR
It's a method use to compare and evaluate investments in a business or different kind of projects and there cash flows. its often used in capital budgeting that makes out the presented vales of the cash flows from a given project that equals to zero .it is also named as the economic rate of the return.
Brigham (2007: 363)
ADVANTAGES OF IRR
It practically predicts the total investment increase the firm's total value.
Manipulate the cash flows of the company's project.
Looks after the risks of the upcoming cash flows and consider the total value of the money.
DISADVANTAGES OF IRR
Requires the estimate cost of capital in decision making decision.
Cant be used in different situation in which the sign of cash flows of project change more than once during in all the projects life time.
When there is capital rationing it may not give the value of maximizing decision.
G. A. Karathanassis(2004);page 64,vol4.
MODIFIED IRR
Its is another technique use to determine and calculate the wealth and probability of the project .it has an assumption that the cash flow are consider .to be paid In an as immediate to the investor.
G. A. Karathanassis(2004);page 68,vol4
HURDLE RATE
It is that defined rate of return in a cash flow analysis on which the amount value is above than it makes the sense of investment and if its less than the hurdle rate the investment proposal is dropped and not to be considered .Its based on firm cost of capital or weighted average cost of capital, that adds or subtracts the risk premium to reflect the projects risk. Also called as rate of return.
PAY BACK PERIOD
It's the amount of the given time period that takes to get return back that have been put in for investment or the time of break even on a investment. This technique can give only a worth while picture of the investment.
Jae K Shim (2009)
ADVANTAGES OF PAYBACK PERIOD
Its very simple to complete and observe as compared to other methods.
It provides a measure of liquidity.
DISADVANTAGE OF PAY BACK PERIOD
On its bases no concrete and final decision can be made.
Time value of money is not considered.
CAPITAL RATIONING
Its is all about placing down limitations on the new amount of investments undergone by a firm, either by arranging and setting up a maximum capital budgets on its parts. It occurs when the management of the respective company places down its maximum amount on the new dated investments on a given and posted time period., it is mostly common when companies previous dated investments on th projects have not performed well at the given circumstances.
ANALYSIS AND CALCULATION
Euro land food has in total capital budget of 120 million euro for eleven new project investments; there three different technique use for selection of theses projects NPV, IRR (INTERNAL RATE OF RETURN) and PAYBACK, but here the company is using IRR method for the evaluations of the project and PAY BACK PERIOD method.
NPV (NET PRESENT VALUE) is totally ignored by the company; however it is used by different companies at different situations.
CALCULATIONS
Project 1 proposal (Replacement and expansion of truck fleet).
Name of the manager:
Proposition of this project is given by Klink, as a senior manager
Project type:
Efficiency
Project introduction
This project related with the expansion of the truck fleet of the company for delivery purposes this projected is consisting of 100 trucks which will be purchased within a span of 2 years ,the capital budget needed for the project in 33 million which is about 20 % of the investment budget this purchase would increase the truck fleet by forty .this would increase the travel and supply routes cutting the supply cost low and efficient transferring of goods with ultimately low cost .
Department of the project:
Distribution.
Divisibility of the Project:
Project is Divisible
Calculation:
Total Outflow: 33 Euro Millions
Net Investment: Euro 30 Millions
Maintenance, fuel,payroll,and Inventories : Euro 3 Millions
IRR
Hurdle Rate
7.8%
8%
On the basis of IRR the company should not accept the proposal because the IRR is less than Hurdle rate.
Payback Period
Maximum Payback Period
6 Years
4 Years
The proposal is rejected because the maximum payback period accepted by the company is 4 years.
Acceptance or Rejection:
The Project part of the total investment budget it is not feasible in any circumstances for the company to continue with this investment proposal as it is not satisfying both the investment techniques as IRR and PAYBACK used and opted by the company this is rejected on IRR and Payback Period method . As this project investment holds about more than 25% of the budget restrain its not feasible to be act and continued on.
Project 2 proposal (New Plant).
Name of the manager:
Proposition of this project is given by Leyden, as a senior production manager
Project type:
Indivisible
Project introduction
As the demand of the products are rising in south eastern region the supply of goods is consider as expensive and time consuming at present the demand are met by shipping procedures but its not enough, there of in one investment proposal for the new plant this plant costs about 45 million pounds and covers about the quarter part of the total budget investment.
Department of the project:
Production
Divisibility of the Project:
Project is indivisible
Calculation:
Total Outflow: 45 Euro Millions
IRR
Hurdle Rate
11.3%
10%
On the basis of IRR the company should t accept the proposal because the IRR is greater than Hurdle rate.
Payback Period
Maximum Payback Period
6 Years
5 Years
The proposal is rejected because the maximum payback period accepted by the company is 5 years.
Acceptance or Rejection:
The Project is accepted on IRR and and rejected on Payback Period. As this project is very expensive to carry out
Project 3 proposal (Expansion of plant).
Name of the manager:
Proposition of this project is given by Leyden, as a senior production manager
Project type:
Indivisible
Department of the project:
Production
Project introduction
This third project is related toward the expansion of the stated plant ,as in south eastern region due to of extra demand of the project the system is over hauled and need to be expanded so that it can meet the local product quantity in the market. After this project the capacity of the new expanded project would increase about 20 %
Divisibility of the Project:
Project is indivisible
Calculation:
Total Outflow: 15 Euro Millions
IRR
Hurdle Rate
11.2%
10%
On the basis of IRR the company should accept the proposal because the IRR is greater than Hurdle rate.
Payback Period
Maximum Payback Period
6 Years
5 Years
The proposal is rejected because the maximum payback period accepted by the company is 5 years.
Acceptance or Rejection:
The Project is accepted on IRR and and rejected on Payback Period.
Project 4 proposal (Development and rollout of snack foods).
Name of the manager:
Proposition of this project is given by Morin, as a senior marketing manager
Project type:
Indivisible
Project introduction
Department of the project:
Marketing
Divisibility of the Project:
Project is indivisible
Calculation:
Total Outflow: 27 Euro Million.
IRR
Hurdle Rate
13.4%
12%
On the basis of IRR the company should accept the proposal because the IRR is greater than Hurdle rate.
Payback Period
Maximum Payback Period
7 Years
6 Years
The proposal is rejected because the maximum payback period accepted by the company is 6 years.
Acceptance or Rejection:
The Project is accepted on IRR and and rejected on Payback Period .
Project 5 proposal (Plant automation and and conveyer systems).
Name of the manager:
Proposition of this project is given by Leyden, as a senior production manager
Project type:
Efficiency
Department of the project:
Production
Divisibility of the Project:
Project is indivisible
Sunk cost:
There is sunk cost involved in this project of about 150'000. its never going to effect the project as it self wether we accept or reject this term .thus it will reduce the terms of accidents.
Calculation:
Total Outflow: 21 Euro Millions
IRR
Hurdle Rate
8.7%
8%
On the basis of IRR the company should accept the proposal because the IRR is greater than Hurdle rate.
Payback Period
Maximum Payback Period
6 Years
4 Years
The proposal is rejected because the maximum payback period accepted by the company is 4 years.
Acceptance or Rejection:
The Project is accepted on IRR and and rejected on Payback Period.
Project 6 proposal (Water treatment).
Name of the manager:
Proposition of this project is given by Leyden, as a senior production manager
Project type:
Indivisible
Department of the project:
Production
Divisibility of the Project:
Project is indivisible
Calculation:
Total Outflow: 6 Euro Millions
IRR
Hurdle Rate
0%
Acceptance or Rejection:
The Project is accepted as it is a low budget project at this time as it is compares in the coming 4 years time period, and hence this will improve the companies image in front of the customers and market potential.
Project 7 & 8 proposal (Market expansions and southward and eastward).
Name of the manager:
Proposition of this project is given by Marco Ponti, as a senior production manager
Department of the project:
Sales
Divisibility of the Project:
Project is divisible
Calculation:
Total Outflow: Euro 30 million
IRR
Hurdle Rate
21.4%
12%
18.8%
12%
On the basis of IRR the company should accept the proposal because the IRR is greater than Hurdle rate.
Payback Period
Maximum Payback Period
5Years
6Years
The proposal is accepted because the maximum payback period accepted by the company is 6 years.
Acceptance or Rejection:
The Project is accepted on IRR but we cannot accept the projects because of the capital constrain and limitations. and accepted on Payback Period .
Project 9 proposal (Development and introduction of new artificially sweetened yogurt and ice cream).
Name of the manager:
Proposition of this project is given by Fabienne Morin , as a senior marketing manager
Project type:
indivisible
Department of the project:
Marketing
Divisibility of the Project:
Project is divisible
Calculation:
Total Outflow: 27 Euro Millions
IRR
Hurdle Rate
20.5%
12%
On the basis of IRR the company should accept the proposal because the IRR is greater than Hurdle rate.
Payback Period
Maximum Payback Period
6 Years
5 Years
The proposal is rejected because the maximum payback period accepted by the company is 5 years.
Acceptance or Rejection:
The Project is accepted on IRR and and rejected on Payback Period.
Project 10 proposal (Networked, computer based inventory control system).
Name of the manager:
Proposition of this project is given by Klink, as a senior Distribution 0manager
Project type:
Indivisible
Department of the project:
Distribution
Divisibility of the Project:
Project is indivisible
Calculation:
Total Outflow: 22.5 Euro Millions
IRR
Hurdle Rate
16.2%
8%
On the basis of IRR the company should t accept the proposal because the IRR is greater than Hurdle rate.
Payback Period
Maximum Payback Period
4 Years
3 Years
The proposal is rejected because the maximum payback period accepted by the company is 5 years.
Acceptance or Rejection:
The Project is accepted on IRR and and rejected on Payback Period.
Project 11 proposal (Acquisition of leading schnapps brand and facility).
Name of the manager:
Proposition of this project is given by Humbolt, as a senior Strategic planning manager
Project type:
divisible
Department of the project:
Strategic planning
Divisibility of the Project:
Project is divisible
Calculation:
Total Outflow: 60 Euro Millions
IRR
Hurdle Rate
27.5%
12%
On the basis of IRR the company should accept the proposal because the IRR is greater than Hurdle rate.
Payback Period
Maximum Payback Period
6 Years
5 Years
The proposal is rejected because the maximum payback period accepted by the company is 5 years.
Acceptance or Rejection:
The Project is accepted on IRR and and rejected on Payback Period.
Ranking
Projects
Expenditure
Result
1
Effluent water treatment at four plants( Project 6)
6.0
Accepted
2
Development and Introduction of new artificially sweetened yogurt and ice cream(project 9)
27.0
Accepted
3
Networked, Computer-based inventory-control system for warehouses and field representatives(project 10)
22.5
Accepted
4
Acquisition of a leading schnapps brand and facilities( Project 11)
60.0
Accepted
GRAPICAL REPRESENTATION
SECTION C
Recommendations
After consulting and project appraisal of the Euro land food and as in general methodology the methods use to select and diversify are IRR and PAYBACK ,but according to my personal recommendations, I would prefer NPV as better tool for determining and selecting the project ,although using one of the discount rates makes easier and simplifies the issues but at the same time it creates major problems for the IRR technique. Some other types of project where IRR is ineffective in the project where there is a complete mixture positive and negative cash flows, another place where IRR faces problem is when the rate of discount of the project in not known .
NPV
Net present value is a overall method of evaluation of companies profitability of projects investment. Value of the stated investment are the present and the discountable values of the cash flow excluding or minus the present value of cash flows.
G. A. Karathanassis(2004)PAGE 64,VOLUME 4
FORMULA
Each of the stated cash flows are subtracted and discounted back over its original present value .After that they are mutually summed and hence npv is the additional sum of all its terms.
,
Lin, Grier C. I.; CIM justification and optimisation. (2000). pp. 36
ADVANTAGES OF NET PRESENT VALUE
Its gives absolute determine value of the project.
It calculate the time value of money
It's a better technique in the absence of capital rationing
DISADVANTAGE OF NET PRESENT VALUE
Using NPV, the project size is not estimated and measured correctly.
Expressed as with value of money and not as a percentage.
Require the total estimation of the cost of capital.
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