Euroland Foods SA Case 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?

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.