Answer 1)
Considering the current financially bearish trend in Pan Europa, the entity needs to work on multiple yet chain corporate activities to avoid hostile takeover. Below are some strategies, which can be used by the company:
i) To begin with, the company must channelize its investment in those projects that will assist the growth in the revenue figures and net income. It is also important for the company not take any additional debt and accept projects within their capital budget as the banks have already signaled red warning for unsustainable debt-equity position of the company with a rejection to grant any additional credit as the company is already highly leveraged compared to other companies in the industry. Analyzing the past performance of the company, we found that for the past three years, the net income has been in negative range of $2 million-$12 million financial losses. Therefore, it has become the need of utmost importance that the company now gain the confidence of their shareholders by investment in capital projects with highest NPV, as this will directly relate to the stock price of the company.
ii) Pan Europa should not decrease the dividend of the company, as doing so will send negative signal amongst the investors. In fact, company should focus on increasing its net income figures and continue to pay consistent dividends to the shareholders. This will also boost shareholder confidence, and they will retain the stocks and not made them available for outside raiders.
In short, when sentiments of the shareholders remain strong and stock price remains high, there is decreased likelihood of a potential hostile takeover.
b. What rows categories in Exhibit 2 will thus become critically important in 1993? What should Pan-Europa do now that they have won the price war?
Since the company was successful in gaining market share, it should now prove its standing to the customers, and should be ready to fulfil short-term as well as long-term expectations of the customers through innovative product line, efficiency improvisation and ensuring strong hold over the market share. Therefore, while the company thrives to gain the confidence of its shareholders and cash on over its hard earned market share, financial metrics such as earnings per share, dividend per share and shareholder equity will be critically important in 1993.
c. Who should lead the way for Pan-Europa?
In my opinion, only Nigel Humbolt deserve to lead the way for Pan Europa while he can also be assisted by Fabienne Morin. Both these employees have shown their innovative approach at work and more than efficient attitude. As for Humbolt, he suggested the best project for the company by acquisition of Schnapps Brand. While the project investment is under the limits of capital budgeting, it is also enticing in terms of profitability and diversity to approach the varied class of customers. On the other hand, it was Morin who designed the price war and was the lead advocate, is yet another deserving candidate to lead the company.
Answer 2)
Using NPV, conduct a straight financial analysis of the investment alternatives and rank the projects. Which NPV of the three should be used? Suggest a way for evaluating effluent treatment program?
Referring to the exhibit 3, we found that the projects are passed through capital budgeting test, while the NPV has been proposed through three methods:
Corporate WACC
ROR
Equivalent Annuity
Important to note, while NPV at corporate WACC do not consider project duration variability, NPV at ROR which includes risk premium but also do not correct for the varying duration, we will suggest to use NPV using Equivalent Annuity as it is the only method that corrects for the project durations.
Using this NPV method, the best project will be the strategic acquisition of Schnapps Brand as suggested by Nigel Humbolt. It is noteworthy to comment that while the capital spending of this project is under the capital spending limits of the company, it also brings diversity in the core business and is promissory in terms of market expansion. With the IRR of 28.7% and projected return of $134 million, accepting this project will provide substantial gain to the revenue figures and confidence of the shareholders. Therefore, on the basis of Equivalent Annuity, the projects will be ranked as follows:
Strategic Acquisition
Eastward Expansion
Snack Foods
Southward Expansion
Inventory Control System
Artificial Sweeteners
New Plant
Expanded Plant
Automation and Conveyer System
Expanded Truck Fleet
Effluent Treatment Program
As for evaluating effluent program, while there is no formal NPV of the project, referring to the exhibit notes, the company can purchase the equipment now for $4million in order to save significant amount as four years later, the equipment is expected to cost $10 million, and that too when immediate conversion will be mandatory. Moreover, if the company do not consider this project as ‘’Must-Do’’, it will also run the risk of company’s pollution record becoming public that will tarnish the image further and may also attract penalties from European Community Regulators.
Answer 3)
a) What aspects of the projects might invalidate the ranking you just derived?
The rankings above are based on some predicted cost of money. However, world economy is volatile and this has significant and immediate impact of rates of returns as well as cost of money. Similarly, unforeseen labor strikes or other negative factors can affect project timeline. Therefore, the above rankings can be invalidated under the following circumstances:
Political Upheavals
Regulatory issues and amendments
Resource availability
Sudden change in corporate architecture to adapt to updated economic scenario
Inflation/Deflation
Synergies between projects
Other project related risks
b) How should we correct for each investment’s time value of money, unequal lifetimes, riskiness, and size?
Various factors that affect each project differently can be corrected by employing different techniques as follows:
i) The time value of money can be accounted for by using advanced methods such as NPV and IRR.
ii) The limitation of unequal lifetime cannot be rectified using NPV or IRR method. In order to overcome this issue, Equivalent Annuities can be used
iii) Riskiness of the project can be covered by rationally increasing the hurdle rate
iv) Different project size can be accounted by multiplying the NPV of the project with the ratio of the size of the projects.
Answer 4)
At the conclusion of this assignment, we are sure that for complex corporate situation like this, Pan Europe should select a criteria based method to narrow down the projects. The layout of project selection can be as follows:
Is the project cost exceeds our capital budgeting limit? Yes/No
Is the project mandatory? Yes/No
Does the return of the project exceeds the IRR multiple? Yes/No
Does this project has high risk involved? Yes/No
Does it covers minimum payback period?
Does this project in accordance to current objectives of the company? Yes/No
Accordingly, we can screen all the projects using this criteria. For instance, if we run all the available projects through the above scenario sheet, following will be the outcome:
Truck Fleet Project is eliminated as it do not surpass IRR. Similarly, other project such as new Plant, Plant Automation, Plant Expansion and Artificial Sweetener all fails to recoup the investment under the given target payback period of the company. Strategic Acquisition project also involves high risk, while Eastwood Expansion, Southward Expansion, Snack Foods and Inventory Control cannot be rated as mandatory.
Therefore, the only capital project which satisfies all the criteria is Effluent Treatment Project, and is therefore a ‘must-do’ project.
References
"Strategic Management and Project Selection: Pan Europa Case Study:." Project Management: A Managerial Approach. n.d. 82-89. Web.
