EUROLAND FOODS S.

A
Capital Budget Planning

SYNDICATE 9
BAGUS KHARISMAWAN (29117129)
DINI MUSTIKA BUANA PUTRI (29117041)
LAKSANA YAMA SASANGKA (29117066)
Company Overview/ Background

 Headquarted in Belgium
 Multinational producer of ice cream, yogurt, bottled water & fruit juice
 Products sold throughout north & western Europe
 Sales of € 160 in 2000
 Publicly traded company

Founded 1924 by Theo

Verdin as a vertical
integration of this diary
Through marketing and
product development grow
the company
Company went public in
1979. Exchange traded in
1993
Problem

 Sales had been static since 1998

 Low population growth in Europe
 Market Saturation in some area
 Failure in new product introduction
 11 major projects totaled more than EUR 316 million
 Board of directors imposed spending limit only EUR 120 million
 Allocate fund among a range of compelling proects, new product,
market expansion, efficiency, improvements, preventive maintenance
safety, pollution control
Senior Manager of Euroland had capital budget for 11 projects that
totaled EUR 316 for the way year, unfortunately The Board of Direction
had imposed this spending limit capital project for only EUR 120.

Therefore, Euroland should to rank the 11 projects to know

which project most profitable for the company.
 Financial Analysis

Estimated in Jan 2001: 1400

 Debt to Equity Ratio of 125% 1200

 Total Asset € 965 million 1000

800
Million €

Total Asset
Shareholder Equity (Book Value)
600 Liabilities

400

200
PROBLEM
0
1998 1999 2000 2001
AREA
 Euroland Strategy & Markets

effeciency New
product

maintenance
Acquisition

Expansion

Where to
Generate Income ?
Financial Measurements

 Cash Flow
Good, show cash estimate ; bad, no accounting for risk and not good for showing efficiency project
returns
 Payback
Good, shows clear point in time when investment is paid for bad, doesnt rank lower growth proects
that need longer
 IRR
Good, shows return rate clearly of project, can then rank based on risk ; bad, cannot evaluate
reinvestment rate and dependent on
 NPV at Corp
Good clearly shows a value of future cash flows at the hurdle rate ; bad if project IRR to WACC
spread is a high inflated value portrayed
Management Proposal

This measurement bias view to the strategic Acquisition

33
60

Replacement and expansion of the truck € 33

45 A new plant € 45
Expansion of a plant € 15
Development and roll-out of snack foods € 27
22.5 Plant automation and conveyor system € 21
 Effluent -water treatment at four plants € 6
Market expansion southward € 30
15
Market epansion eastward € 30
27 Development and introduction of new artificially sweetened
yogurt and ice cream € 27
27 Networked, computer -based inventory control system € 22.5
Acquisition of a leading schnapps brand and associated facilities €
60
30
21
30 6
The Constraints

“As a matter of policy, investment proposals at Euroland Food were

subject to two financial tests, payback and IRR”

Type of Project Minimum Acceptable IRR Maximum Acceptable Payback Years

1. New Product / Markets 12% 6 years

2. Product / Market Extension 10% 5 years

3. Efficiency Improvements 8% 4 years

4. Safety or Environmental - -
 Test- Payback

8
7
6
5
 Market Expansion 12 % 4
3
 Product 2
Innovation
1
10% 0
Years

Payback (Years)
 Efficiency 8% Maximum Payback Accepted

Pass

Fail
 Test - IRR

3000.0%

2500.0%

2000.0%
 New Product or New 1500.0%
Markets 6 Yrs
1000.0%

 Product or market 500.0%

extension 5 Yrs 0.0% IRR
IRR

Minimum Accepted ROR

 Effeciency 4 Yrs

Pa
Fail

ss
NPV Subject

New Expanded Automatio Southwa Eastwar Inventor

Expand Artificial Strategic
Plant Plant Snack n and rd d y
Truck Sweeten Acquisitio
(Dijon, (Nurember Foods Conveyer Expansio Expansio Control
Fleet er n
France) g, Germany System n n System
NPV at
Corp.
WACC -2.88 1.49 0.41 3.74 -1.31 17.99 13.49 13.43 1.75 69.45
(10.6%)

NPV at Min
-0.19 2.81 0.82 1.79 0.48 14.85 10.62 10.97 2.67 59.65
ROR
Rangking The Projects by Strategy

 Southward expansion
 Eastward expansion
 Artificial Sweetener
 Strategic Acquisition
OUR Recommendation

NPV at
NPV at Equivalent Total
Project IRR Corp. WACC Expenditure
Minimum ROR Annuity Budget
(10.6%)

Strategic Acquisition 27.5% 69.45 59.65 10.56 60 60

21.4% 17.99 14.85 2.63 30 90
Southward Expansion
Artificial Sweetener 20.5% 13.43 10.97 1.94 27 117

So because the BOD set the project limit <=EUR120 million, so Euroland Foods
S.A should choose Strategic Acquisition, Southward Expansion, and
Artificial Sweetener project.