Case Sompass

Case 1 Corporate Finance: Capital Budgeting and Resource Allocation

Compass records, in Bruner

Each group should hand in a final report plus be prepared to present their results at a seminar.

The report is favoured if problems, methods, and relevant references are well formulated and discussed, together with a thorough analysis.

Try to keep the reports short and concise. Please note, that references, properly used, in the text also have to be included in the reference list. 10 pages, well written, will be enough to make a clear illustration and solution to the case.

At each seminar approximately 5 groups will be included. Each group must be prepared to present all parts of their reports. The responsible teacher for each seminar has the possibility to assign a specific topic for the group to present. Check the group list to see how many teams there are to share the time.

Grading: Maximum point equals 5. The seminar is mandatory and a person not present will have a reduction of 25% of the maximum number points. For student on master level (Financial management) the grading will emphasize the written presentation and the use of references, i.e. the theoretical approach.

The case must be handed in at 16.00 the day before the presentation. Hand it in to Stefan Sjögren’s mailbox (D6) or in the mailbox outside the glass door (D6).

Below are some issues to help you solve the case:

1. Identification of relevant cash flows; in particular, the treatment of: sunk costs; cash flows obtained by cannibalising another activity within the firm; exploitation of excess capacity; corporate overhead allocation; cash flows of unrelated projects; and inflation.

2. The critical assessment of a capital investment evaluation system.

3. The treatment of conflicts of interest and other ethical dilemmas that may arise in the investment decisions.

4. The relevance of cash flow from assets that may be separable from the core project.