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Euroland Foods SA Case Solution

Solution Id Length Case Author Case Publisher
2567 1552 Words (6 Pages) Robert F. Bruner, Casey S. Opitz Darden School of Business : UVA-F-1356
This solution includes: A Word File A Word File

The case study draws deeper insights into the financial conditions of Euroland Foods S.A with respect to the new proposed capital budget prepared by the senior management committee. The case begins with a review of Euroland's present financial situation, in which they have gained some market share and penetrated the European ice cream and frozen yogurt industry but have fallen short of their financial markers as compared to their industry. The case analyzes that the company is experiencing static sales growth since 1998 due to a number of reasons which has inevitably impacted their profitability and have caused their stock price to become lower than book value and their Price/Earnings (P/E) ratio to be unsatisfactory relative to their industry competitors. To counter this, the senior management committee drew up a meeting in which they proposed 11 different proposals to take the company back on track but with a limited capital budget of €120 million.

Following questions are answered in this case study solution:

  1. Prepare to discuss the strengths and weaknesses of the various measures of investment attractiveness as used by Euro land Foods. Will all of the measures rank the projects identically? Why or why not?

  2. Please rank the 11 proposals on the basis of purely economic considerations. Then rank them a second time based on any other considerations that you believe are important. Are the rankings identical? Why or why not?

  3. Which set of projects should Wilhelmina Verdin recommend to the board of Euro land Foods for the capital budget for 2001?

Case Study Questions Answers

1. Prepare to discuss the strengths and weaknesses of the various measures of investment attractiveness as used by Euro land Foods. Will all of the measures rank the projects identically? Why or why not?

The current profitability levels and financial condition of Euroland Foods S.A are very substandard and have resulted in the company not making any significant financial gains with their Net Income decreasing by over 27.3% over the last 3 years. Moreover, their stock price has fallen below book value and their P/E ratio is not up to the par as compared to their industry competitors. As a result, the senior management committee devised a plan for investment projects for the company in order for the company to start having some financial gains and re-instill investor confidence so that their public equity share prices might go up. 

The investment projects are essentially based on two effective investment attractiveness measures to rank the projects in terms of their future profitability for the company. Senior management officials employ two different indicators for investment attractiveness: IRR and the Payback Period. These are two widely used industry measures to rank investment attractiveness for a company. Moreover, the company also takes into account its WACC to measure investment attractiveness relative to the NPV of the investment. While these measures are quite efficient at evaluating the suitability of an investment project, they have some subliminal flaws and will take not into account the current context of the industry and company. Moreover, these measures will not rank the projects identically as discussed further.

IRR is essentially the expected return on an investment project. If the rate is higher than the company’s cost of capital, then it is deemed a suitable project. An advantage of using IRR is that it establishes a standard value for all projects that may be compared to a company's capital structure. However, this measure is not a true representation of the value that an investment project will add to the company. Moreover, IRR is incompatible to compare investment projects that are 'mutually exclusive, meaning that if both of the investments are considered suitable, then management cannot decide which one to pick or rank in our case if only one is to be picked. In the case of Euroland, the company uses IRR to assess the risk associated with the investment. If an investment is considered riskier, the company ought to earn more returns as compared to a less risky project and this is how the company is ranking the investment projects relative to IRR and risk. 

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