Euroland Foods Case Study

1220 Words 5 Pages
INTRODUCTION Euroland Foods S.A. case is a study of capital budgeting. The case illustrates what problems the senior management committee faces when their proposals exceed the capital budget given by the board of directors. Sales were becoming stagnant, and the committee wanted to try and find ways to increase the sales. Some ideas were expanding the market to more European countries and offering new products. The committee had to agree on how much funds would be allocated to their proposals.
BACKGROUND OF FIRM
Euroland Foods is a European producer in different types of ice cream, yogurt, bottled water, and fruit juices. The company has been in operation since 1924 and went public in 1979. Ice cream is its most profitable line of business
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The first proposal of replacing a new truck fleet is the only proposal with a lower IRR than required, and the board of directors see a high risk involved. A new plant proposal and expansion plant proposals contrast from different reports saying existing facilities can be used to produce food if they are operated correctly. Investing in multiple new ventures for the firm would be a high risk as well. Other food companies with roll-outs of snack foods have settled in the European market, and it would be difficult to try and compete. Using artificially sweeteners instead of natural sweeteners might decrease costs to the producers, but the results are unknown. Investing in effluent-water treatment equipment has the cheapest price of EUR6 million and is not mandatory for this year. The proposal is unattractive to the company and has no effect on the …show more content…
The total cost of the proposals would equal EUR120 million which is the same number of the capital budget approved for 2001. All efficiency proposals are included, and the proposals will generate a high return. The first proposal is split in half to reduce the cost and meet the budget. The other half of the trucks will be brought in next year. The automation and conveyer systems has a higher IRR of 8.7% and is greater than the minimum ROR of 8.0%. The inventory-control system has a lower payback period of three years than the maximum payback period accepted of four years. The acquisition of a leading schnapps brand and associated facilities is the most expensive proposal costing EUR60 million but has the highest IRR of 27.5%. The proposal has a payback period of five years which is less than the maximum payback accepted of six years. The proposal has the highest NPV at Corp. WACC of 69.45 and is approximately 10 higher than the NPV at minimum

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