key issues:

1) Axeon N.V company started with small business and then became a complex multinational
and the implementation of proper strategic control and performance evaluation system was
not there because of which managers were rewarded for their short term revenue and profits
and not for contributing to long term optimi!ation of shareholder return. Also the subsidiaries

having considerable autonomy to determine their product" mix and set up of new
manufacturing facilities if they can #ustify the investment in their own market.
$) %he company emphasi!es on decentrali!ation allowing their subsidiaries managers

considerable autonomy regarding what products to sell in their territories and the products

manufactured by one subsidiary were sold to other subsidiaries at the same price as to agent.
%herefore company&s strategic control and performance evaluation system were deviating

from the common goal causing subsidiaries to compete with one another. Also the
subsidiaries having considerable autonomy to determine their product" mix and set up of

new manufacturing facilities. 'anagers were rewarded based on the performance of their own
subsidiary alone and not on the basis of Axeon as whole. %hus all this indicates that the
proposal was uneconomical.
() %he proposal to set up A)"*$ and manufacturing facilities in +., was re#ected on the basis
that it was uneconomical and incorrectly calculated resulting in loss to the company.
-f this proposal to manufacture A)"*$ with the help of newly devised technology was to
be used in Netherlands it would have been more successful as no further capital investment
and also due to the lower fixed variable cost. 'oreover the +., subsidiary manager claimed
that with this new technology the subsidiaries would rapidly develop a *.. ton annual market
for A)"*$ in the +.,. almost as large as Axeon&s already existing /..ton worldwide market
for the chemicals.
%herefore expanding the production in Netherlands can achieves the 0conomies of 1cale and
reduce cost. %his could be more profitable in long than building a new plant in +.,.
-n my opinion expansion in Netherlands is the best interest of axeon&s company.

Other issues of the proposal are:

1)The proposal's calculation of the Net Present Value of future cash fows should use the

Company's required rate of return (12%) but not the 8% loan interest. This

dramatically lowers the projects Net Present Value.

2) The plan calls for major renovation at the end of seven years. It only takes into

accounts the selling price of the old plant but does not takes into consideration the
price of new one. In other words, it ignores the project capital infow that comes from
the sale of old facility. Which further reduces the value of Net Present Value.

3)The proposal's plant depreciation is too fast. The straight line depreciation must equals

annual depreciation. Which is considerably much less than the depreciation used in
the proposal. This lowers the proposal's depreciation tax shield and further lowers the
presented Net Present Value.

4)The proposal indicates plans to borrow the capital required to set up the plan. Since
the tax sheild efect of interests are accounted for in the required rate of return it
does not need to be accounted for in the NPV. However, no provisions are made
for payment on the loan principal in the NPV calculation. Such provisions would
afect the operating cash fow, further lowering the NPV. Correcting the original
proposal, according to the items above, reveals that the proposal is un-economical.
The corrected NPV is negative or, -242,703 and the IRR is only 8%, far below the
required 12%.