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Q1 Strategically, what must Pan-Europa do to keep from becoming the victim ofa

hostile takeover?
One of the biggest issues Pan-Europa is facing is their debt to equity ratio and the unwillingness of
their creditors to supply additional credit. Debt is not always a bad thing but when it becomes too
large, something needs to be done. Pan Europa needs to choose one of the proposed projects and
run with it to gain revenue and lower their debt to equity ratio. In doing this, Pan-Europa will gain
confidence with investors if they continue to pay their dividend while increasing their bottom
line. Decreasing expenses while driving the annual revenue growth through these capital budget
projects is essential. The rows/categories that are becoming critically important in 1993 are the static
growth in gross sales, and the decline in net income and EPS. Pan Europa needs to use its increased
market share to its advantage and product development could be the key to their problems.
Fabienne Morin who was the lead advocate and who won the price war should led the way with the
company with his innovative marketing strategies to introduce new products.
Using NPV, conduct a straight financial analysis of the investment alternatives
and rank the projects. Which NPV of the three should be used?

Due to the duration of the project it would be wise to use the Annuity instead since it
Corrects discrepancies project durations unlike the NPV. Using this analysis, the
preferred project would be 11, the Strategic Acquisition. Then following in order would
be:
 Eastward Expansion
 Snack Foods
 Southward Expansion
 Inventory Control System
 Artificial Sweeteners
 New Plant
 Expanded Plant
 Automation and Conveyor System
 Expand Truck Fleet
 Effluent Treatment Program (which has no NPV)

While the Effluent Treatment Program has no formal NPV it can be considered an investment of
4M now to save a cost of 10M in 4 years.
What aspects of the projects might invalidate the ranking you just derived? How should we correct
for each investment’s time value of money, unequal? lifetimes, riskiness, and size?
There are many aspects that could invalidate the simple NPV analysis of the projects.
They include
 Risk
 Political considerations
 Regulatory issues including health, safety and environmental
 Incompatibility with corporate strategy
 Resource availability

How should we correct for each investment’s time value of money, unequal? lifetimes, riskiness,
and size?
 Different analysis techniques and different assumptions can be used to correct for the
various factors that affect each project differently. For example:
 The time value of money reliable measures are discounting methods such as
NPV or IRR.
 Unequal lifetimes of the projects are solved using Equivalent Annuities.
 Risk can be deal with by increasing the hurdle rate.
 Different project sizes can be can be measured by multiplying the NPV by the
ratio of the size of the projects or by using a profitability ratio.

Are any “must do” projects of the nonnumeric type?

The Effluent project is a must do project. The Automation and Conveyor Systems might be a must
do since it is a health hazard to employees. These impose both safety and environmental issues.

What elements of the projects might imply greater or lesser riskiness?

Projects that involve small technology changes like expanding the truck fleet would have low risk.
Increasing levels of technological sophistication such as automation or introducing artificial
sweeteners into products would also increase implementation risks. Another risk area for any
producer in a capitalist environment is attempting to increase markets with new products in new
areas. The prospective customers may simply choose to not buy the product. Other elements of
risk include project size, complexity and length of the period of return.
Might there be any synergies or conflicts between the projects?
There are real synergies between the plant expansion/additions, automation, truck upgrade and
the geographic expansion projects.

Do any of the projects have nonquantitative benefits or costs that should be


considered in an evaluation?

Projects that have nonquantitative costs and benefits would include:


Projects that impact the company’s regulatory compliance such as effluent treatment
(environment) and warehouse automation (safety). Several of the projects could impact the
company’s image. For example, the snack food rollout could be positive because of its wholesome
connotations while the acquisition of the schnapps brand could be negative. The effluent project
could be positive by showing the company’s willingness to act on environmental concerns early.
Similarly, the automation project could be cast a positive step towards increased safety. The plant
expansion project may be positive or negative depending on whether the community reacts to
new jobs or factory encroachment.
Considering all the above, what screens/factors might you suggest to narrow
down the set of most desirable projects?

1) I would recommend four screens be applied using the following factors:


Does the project incur a high cost?
Exceeds Tolerable Cost Value
Is the project a “Mandatory”?
Options – Yes/No
Does the project meet minimum IRR?
Options –Ok/Not Ok
Does the project meet maximum payback period?
Options –Ok/Not Ok
Does the project incur high risk?
Options –Ok/Not Ok
Does the project m eet the current corporate strategy?
Options –Ok/Not Ok

What criteria would you use to evaluate the projects on these various factors?

Using these screens and criteria the following projects would be eliminated outright:
Truck Fleet (1) because it does not meet the minimum IRR and exceeds the
maximum payback period dictated by company policy.

New Plant (2), Plant Expansion (3), Artificial Sweetener (4) and Plant Automation (5) all because
they exceed the maximum payback period dictated by company policy. Strategic Acquisition (11)
and Artificial Sweetener (4) would both be eliminated due to excessive risk. Strategic Acquisition
(11) would also be eliminated because it does not match the current strategy Strategic Acquisition
(11) eliminated due to high cost.
Derivative –Add ons or minor enhancements to existing systems. Clearly bounded and require few development
resources. Completed quickly.
Platform - Cros between derivative and breakthrough. More technology change than derivative but not
completely new, untried systems like breakthrough. Fundamental improvements over range of performance
dimensions (Speed, functionality, reliability, etc.) rather than just one or two. Designed for future expansion.
Breakthrough Projects – Significant changes to both technology and business processes. Establish new core
systems that fundamentally from previous. Large degree of change in many functional areas. Require large
resources allocation and heavy management involvement R&D Projects– Takes the longest time to finish.

Question 7: Based on all the above, which projects should the management
committee recommend to the Board of Directors?
The following projects should be recommended based on table below.
1. Effluent Treatment
2. Eastward Expansion
3. Southward Expansion
4. Snack Foods
5. Inventory Control