Euroland Case Study

Introduction

Euroland Foods Company is a multinational producer of high-quality ice cream, yogurts, bottled water and fruit juices founded by a Belgian farmer Theo Verdin in 1924 and is based in Brussels, Belgium. Their high-quality ice cream is their main product that accounted for 60% of their revenue. Yogurts accounted for 20%, bottled water and fruit juices are both 10% of their revenue. The idea of the business is emerged from Verdin’s dairy business. This has become successful and Verdin made Euroland public in 1979, and by 1993, was listed for trading on the London, Frankurt, and Brussels exchanges.

Euroland Foods prepares capital budget annually. This is done by a committee of senior managers. The committee of senior managers was comprised of five managing directors, the president directeur-general, and the finance director. The president directeur-general asks for investment proposals from the managing directors. The proposals included a brief project description, a financial analysis, and a discussion of strategic or other qualitative considerations. This capital budget is then presented to the board of directors for approval.

The board of directors of Euroland Foods had 12 members. Three members were the Verdin family, four members were managers, and the rest of five members were outside directors. The four biggest stockholders were members of the Verdin family, the combined company executive, Venus Asset Management, and Banque de Bruges et des Pays Bas. The firm's shares outstanding, each of four biggest stockholders held, were 20%, 10%, 12%, and 9%. The residual 49% of the company's shares outstanding were widely owned. The company's shares traded in Brussels and Frankfurt, Germany.

Statement of the Problem

The senior manager of Euroland Foods was to meet to draw the firm’s capital budget for the new year. There are 11 projects being considered which totaled EUR316.5 million. However, the board of directors imposed a spending limit of capital projects at only EUR120 million. What projects must be approved, implemented and the funds be allocated with in year 2001?

Analytics

The value of the project is equal to its net present value (NPV), which is simply the present value of the project’s free cash flow discounted at the cost of capital. The NPV tells how much a project contributes to shareholder wealth – the larger the NPV, the more value the project adds; and added value means a higher stock price. Thus, NPV is the best selection criterion. NPV is always better because it tells how much each project will add to the firm, and value is what the firm should maximize.