Euroland Foods Question

Will all of the measures rank the projects identically?

It is obvious that all of the measures do not rank the projects identically. After all, if they did, what would be the purpose of looking at several different measures? Euroland Foods has a policy on investment proposals which makes them subject to two financial tests: payback and internal rate of return. A proposal is sorted according to which type of project. If the new proposal doesn’t meet the minimum acceptable internal rate of return and the maximum acceptable payback years, then it is automatically ranked very low. If the project is a safety or environmental project, there are no tests that must be met for market attractiveness.

While a proposal may pass the internal rate of return test, it still might not pass the payback test. A proposal might pass both tests but that doesn’t mean it will automatically be accepted. That is why there are several measures to look at when ranking the projects. According to exhibit 3, there are six different measures of which Euroland could rank the investment attractiveness. Expected free cash flows, payback (years), internal rate of return, net present value of weighted average cost of capital, net present value at minimum rate of return, and equivalent annuity are all different measures of which Euroland can rank the investment attractiveness.

While a lot of these rankings are similar, none of them are identical. The reason for this is because not every project is going to produce the same exact results. When making such important decisions, whichever investment opportunity will produce the best results must be determined. Accurately determining the different measures and ranking them accordingly is the best way to determine the investment attractiveness, thus which projects to go with and still abide by the budget.