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Unformatted text preview: MBA 820 6-8 PM M W CASE #1 Pan-Europa Foods, S.A MBA 820 Case #1: Pan-Europa Foods, S.A Consulting 1 EXECUTIVE SUMMARY Pan Europa has been facing difficulties that include a high debt-to-equity ratio, high price-to-earnings ratio, static sales, and the threat of a hostile takeover. The board of directors capped this years capital spending at 70 million. Senior managers are faced with the challenge of allocating funds among eleven potential projects [Appendix A] . The Senior Management Committee has asked for recommendations on project selection. After exhaustive research and analysis, the group recommends the following project portfolio: Table 1: Recommended Portfolio (in million ) Portfolio Cost NPV @ 10.6% NPV @ ROR Eq. Annuity 1, 3, 5, 6, 10 65 -1.34 2.30 0.82 The above portfolio is generated using a portfolio model, which evaluates projects using non- quantitative attributes as well as financial attributes [Appendix E and Appendix F.] The project attributes were determined, and each attribute was assigned a weight, taking into account Pan Europas long and short-term objectives given their current situation. The customizable Model will be provided to the Senior Management Committee along with instructions on how to modify the attributes and their weights as the committee sees fit. ASSUMPTIONS s Project 6 : Pan Europa has no selection test for this project. Project 6 is automatically included in the portfolio. s Projects 7 and 8 : Sales and distribution could not sustain both projects at once. Only one project could be selected. s Total capital expenditures could not exceed 70m. ANALYSIS For the initial analyses, all eleven projects were evaluated using two methods. With the first method, projects were ranked based on individual financial measures. With the second method, a portfolio model was built taking all Pan Europas financial tests into consideration. Both methods take into account the assumptions listed above. A third method was then applied which involved scoring projects and building a portfolio using a model that optimizes the portfolio value for Pan Europa. 1. Individual Financial Measures: Projects were ranked based on payback period, IRR, spread in the IRR, NPV at WACC, NPV at minimum required ROR, and the equivalent annuity [Appendix B.] Projects were ranked using one financial measure at a time. Projects that did not meet the requirement for the ranking criterion were eliminated from the respective selection process, e.g. the payback period exceeds the maximum payback allowed when ranking was based on payback period, IRR is less than minimum ROR when using IRR rankings, or negative NPV when using NPV ranking. The budget constraint of 70m was taken into account. Starting with Project 6, and adding the first ranked project, other projects were added to the selection, in ranking order. If a project forced the total cost over 70m, that project was not selected and the next ranked project was evaluated. the next ranked project was evaluated....
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