Euroland Foods 2021

Abstract

Facing strong pressure from investors to improve financial performance and preserve capital, senior management at Euroland Foods must select which projects to fund across a slate of major investment proposals for 2021. While the board of directors has imposed a limit of EUR120 million for the company budget, various managers have proposed projects totaling EUR316 million. The task for students is to evaluate each proposal's financial attributes and qualitative factors (mainly strategic considerations and internal company politics), then choose the projects to be approved.This case presents two alternative modes of delivery: (1) a standard case discussion; or (2) a role-play exercise with a debriefing. The teaching note includes role-playing character descriptions for distribution to students and describes both modes of delivery. The different viewpoints of the company managers featured in these character descriptions is a unique aspect of this case, which affords students the opportunity to grapple with some aspects of capital budgeting that they don't normally encounter. The multifunctional aspect of this case affords an opportunity for a finance instructor to coteach it with an organizational behavior instructor. Points of linkage are in the areas of group leadership and the assessment and management of group decision-making processes. The case is suitable for intermediate corporate finance courses.

Excerpt

May 18, 2022

Euroland Foods 2021

In early January 2021, the senior management committee of Euroland Foods (Euroland) was to meet to draw up the firm's capital budget for the new year. Up for consideration were 11 major projects that totaled more than EUR316million in a context where the board of directors had imposed a spending limit on capital projects of EUR120million. Even at the limited rate, investment of EUR120 million would represent a major increase to the firm's current asset base of EUR965million. The challenge for Euroland's senior managers was to allocate funds among a range of compelling projects: new product introduction, acquisition, market expansion, efficiency improvements, preventive maintenance, safety, and pollution control.

The Company

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Keywords: resource allocation, company management, capital budgeting, capital rationing, capital investment, investment analysis, net present value, NPV, internal rate of return, IRR, risk-adjusted discount rate, profitability index, financial decision-making, company politics, payback criterion, equivalent annuity, cash flow, time value of money, risk assessment, strategy, role play