Product details

In January 2001 the senior-management committee of this company has to decide which major projects should be funded for implementation by the company starting in 2001. The board of directors has arbitrarily set a limit of 120 million euro to be spent on capital projects in 2001. Various managers, however, have proposed projects totaling 316 million euro. The task for the student is to evaluate the completed discounted-cash-flow (DCF) analyses which the case presents, along with qualitative factors (mainly strategic considerations and internal politics of the company), and to choose the projects to be approved. The main objectives of this case are (in descending order): (1) To explore the problem of resource allocation within corporations; (2) To illustrate and assess the impact of capital rationing on capital investment decisions; (3) To exercise and interpret the implications of classic tools of investment analysis (eg, net present value (NPV), internal rate of return (IRR), payback), and to consider possible adjustments for differences among the projects in risk (eg, through the use of risk-adjusted discount rates), size (eg, through the profitability index), and life (eg, through using equivalent annuities, replacement chains, or both); (4) To consider the impact of behavioral influences on financial decision making.