Case Study - Pan Europa Foods

This case study talks about the sales of Pan-Europa Foods had been static, due to the low population growth in northern Europe, market saturation in some areas, and recent failures in new product introduction. Managers want to introduce more new products. However, the board of directors have set a limit of €80 million to spend on capital projects although all the 11 projects proposed will cost up to €208 million. Therefore, the senior management committee of Pan-Europa Foods has to decide which major projects the company should fund for immediate implementation.

The authors mentioned in the article that the company is currently trading at a price below comparable companies due to reduced profitability and a failure to gain sufficient market share for new products. As the stock price is decreasing, raiders are potentially buying up the stock. This will put the company in the risk of becoming the victim of a hostile takeover. To avoid this situation, they need to adopt strategies that drive up the stock price to discourage buyout. Moreover, they should concentrate on earning more market share to increase net income and gross sales.  Then the problem goes to “who” can lead this innovation in the company. From the introduction of members of the senior management committee, Fabienne Morin and Nigel Humbolt will be able to lead the change on this strategy as Morin helped the company gain obvious market share in the prices war although financially difficult and he supports growth-oriented projects while Humbolt initiated the innovation changes in the company.

When it comes to decide which projects to be approved, it is necessary to take a look at the free cash flow of all the investment alternatives, and then conduct a financial analysis to rank the projects. As shown in Exhibit 3, there are multiple ways to evaluate the alternatives, but due to the duration of the projects, it would be better to use Equivalent Annuity as it corrects for differences in duration among various projects. This will avoid the risk premium that NPV at the minimum ROR might cause. Via using this analysis, the preferred project would be Strategic Acquisition, which has the highest value of Equivalent Annuity, 7.33. The rank of the projects would be:

1. Strategic Acquisition
2. Eastward Expansion
3. Snack Foods
4. Southward Expansion
5. Artificial Sweetener; Inventory-Control System (same value of Equivalent Annuity)
6. New Plant
7. Expanded Plant
8. Automation and Conveyer System;
9. Expanded Truck Fleet
10. Effluent Treatment Program (Which has no NPV)

Since the Effluent Treatment Program has no formal NPV, it can be considered an investment of $4 million now to save a cost of $10 million in 4 years.

However, the ranking conducted above might invalidate due to different aspects like, risk, political conditions, incompatibility with company strategy, resources accessibility, regulatory issues including health, safety, and environment. Other aspects like each project’s different time value of money, unequal lifetimes, and different sizes might also affect the accurate evaluation of projects. Multiple analysis techniques and different assumptions can be applied to correct these issues. Unequal lifetimes of the projects can be solved via using Equivalent Annuities, and the reliable measures for the time value of money are NPV or IRR.  Different sizes of the projects can be measured by multiplying NPV by the ration of the project’s size. While for the risk, increasing minimum acceptable rate of return will help.