Guide Questions

1) What are the investment measures in case Exhibit 3 and what do they
measure?
Investment Measures
IRR

What do they measure?

Measures the profitability of potential
investment.
Measures the length of time that it takes
for a project to recover its initial cost
from the net cash inflows that it
generates. Sometimes referred as the
time that it takes for an investment to
pay for itself.

Payback

2) Prepare to discuss the strengths and weaknesses of the various measures of

investment attractiveness as used by Euroland Foods. Will all of the measures
rank the projects identically? Why or Why not?
IRR
Advantages
a) Simplicity
b) The timing of cash flow is considered

Disadvantages
a) Ignores the size of the project
b) Ignores reinvestment rates
c) Ignores Future Costs
d) Hurdle Rate is not required

Payback
Advantages
a) Simplicity
b) Provide information about how long funds
will be tied up in a project
c) Shorter the payback, the greater the
project's liquidity

Disadvantages
a) No risk adjustment
b) Ignores cash flows beyond the
payback period
c) Ignores time value of money
d) Is often important to new
companies that are "cash poor"

3) Please rank the 11 proposals on the basis of purely economic consideration

Ranked by IRR
Acquisition

60M

Effluent Water

6M

Go Southward

30M

Ranked by Payback
15.50
%
15.10
%
9.40
%

Inventory
Control
Effluent Water
Acquisition

Ranked by Profitability
Index

22.5M

Acquisition

60M

6M

Effluent Water

6M

60M

Go Southward

30M

3.39
%
1.67
%
1.5%

Inventory
Control
Total

22.5M
118.5
M

8.20
%

Artificial
Sweetener
Go Southward

27M

Go Eastward

30M

Inventory
Control
Total

30M

22.5M
118.5M

4) Rank the proposals a second time bases on any other considerations that you
believed that important.
Project
1) Effluent Water

2) Replacement and
Expansion of the
Truck Fleet

3) Plant Automation and

Conveyer Systems

Benefits
a) Protecting present
market share
b) Environmental
category
c) Building a good
reputation
a) 15 % increase in
cubic meters of
goods hauled on
each trip
b) The new tractors
would also be more
fuel and
maintenance
efficient
c) The increase in the
number of trucks
would permit it more
flexible scheduling
and more efficient
and will cut delivery
times (possibly
inventories)
d) Support
geographical
expansion over long
term
a) Reduced the chance
of injury by
employees
b) Improved throughout
speed

Investment
Cost
6M

33M

21M

1.15
%

4) Development and
Introduction of New
Artificial Sweetener

5) Inventory Control

TOTAL:

a) Growing demand for

low calorie products
b) Protecting of present
market share
c) Prevent brand
suffering
a) Shorter delays in
ordering and order
processing
b) Better control of
inventory
c) Reduction of
spoilage
d) Faster recognition of
changes in demand
at the customer level

27M

22.5M

109.5M

5) Are the rankings identical? Why or why not?

6) Which set of projects should Verdin recommend to the board of Euroland
Foods for the capital budget of 2001?