Euroland Foods Financial Analysis (7)

Euroland Foods Financial Analysis (7) - Financial Analysis:...

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Financial Analysis: The Board of Directors, at a recent meeting, unanimously decided to limit capital spending to EUR120 million. This was partially in response to an aggressive debt reduction plan, as their debt equity ratio was 125%. With this knowledge and the desire to increase ROI, the senior management group examined the eleven different projects. As a matter of policy, investments proposals were subject to two financial tests: 1) payback; and, 2) IRR. The project hurdles were established in 1999 (see Table 1). Along with these tests, examinations of NPV, Equivalent Annuity and the Profitability Index will be used to evaluate the projects. Payback period provides information about the risk of the project. If the project payback period is equal to the minimum requirement set by the company, it is said to be a risky project. If the payback period is less than the minimum requirement then it is less risky. For judging the project proposals, there needs to be an unbiased approach towards evaluating which project needs to be selected. Considering these evaluation tests, there are many combinations of project proposals that can be made. For example, projects 10, 6 and 7 are all considered high risk investments but will produce the maximum returns on investments. Project 7 has a lower IRR compared to other projects but does have a higher NPV. Project 10 has a higher risk due to the higher investment budget, and so there needs to be a different discount rate in order to reduce the risk associated with the project. Also, the Debt/ Equity ratio needs to be taken into consideration. Projects 6 and 7 (Southward & Eastward Expansions) are different investments with their
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Euroland Foods Financial Analysis (7) - Financial Analysis:...

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