Euroland Foods S.A.

Introduction

In Jan 2001, they met to draw up the firm’s capital budget for the new year. They were up for consideration of 11 major projects that totaled more than EUR316 million. The broad of directors imposed on only spending a limit of EUR210 million on capital projects; even so investment at that rate would represent a major increase in the firm’s current asset base of EUR965 million.

Funds were to be allocated among a range of compelling projects: new-product introduction, acquisition, market expansion, efficiency improvements, preventive maintenance, safety and pollution control.

Euroland Foods was a multinational producer of high-quality ice cream, yogurt, bottled water and fruit juices. The company was originally founded in 1924 by a Thei Verdin, a Belgian farmer, as an offshoot of his dairy business with a keen attention for product development and shrewd marketing. The company went public in 1979 and by 1993, was listed for trading on the London, Frankfurt and Brussels exchanges.

In 2000, Euroland Foods had sales for almost EUR1.6 million. Ice cream accounted for 60% of the company’s revenue, yogurt account for 20% and the remaining 20% was divided equally between bottled water and fruit juices.

Most members of management wanted to expand the company’s market presence and introduce more new products to boost sales with the hope that increased market presence and sales would improve the company’s market value. The company’s current stock was at 14 times earnings, just below book value. This price/earnings ratio was below the trading multiples of comparable companies and it gave little value to the company’s brands.

Resource Allocation

The investment proposals included a brief project description, a financial analysis and a discussion of strategic or other qualitative considerations. The proposals were subject to two financial tests: payback and internal rate of return (IRR). The sliding scale of IRR tests as a way of recognizing differences...