Pan europa foods - Project Management
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The document provides answers to questions about investment projects being considered by Pan-Europa Foods. It conducts financial analyses of 11 projects using NPV and lists them in order of ranking. It then discusses adjusting the analysis for risk, time value of money, project lifetimes, and size. Based on strategic fit, mandatory status, IRR, payback period, risk level, and other qualitative factors, the recommended projects are: Effluent Treatment, Eastward Expansion, Southward Expansion, Snack Foods, and Inventory Control.
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Pan europa foods - Project Management
- 1. Pan Europa Foods Analysis Robbi Palacios Subject:Project Management Regis Program
- 2. Question 1 a. Strategically, what must Pan-Europa do to keep from becoming the victim ofa hostile takeover? Answer: Pan Europa should not decrease the dividends of the shareholders to not devalue the stock price of the company. Instead should just decrease capital spending as what they board of directors have decided. In short, they should adopt strategies that should increase stock price not push it down to discourage buyout. b. What rows categories in Exhibit 2 will thus become critically important in 1993? What should Pan-Europa do now that they have won the price war? Answer: As suggested by their bank they should reduce their debt due to the high debt to equity ratio incurred during the price wars and use their competitive market reach to attain this. c. Who should lead the way for Pan-Europa? Answer: Humboldt and Morin should be leading the charge on this strategy since these folks are the ones initiating the innovative changes in the company.
- 3. Question 2: a. Using NPV, conduct a straight financial analysis of the investment alternatives and rank the projects. Which NPV of the three should be used? Due to the duration of the project it would be wise to use the Annuity instead since it correctsdiscrepancies project durations unlike the NPV. Using this analysis the preferred project would be 11, the Strategic Acquisition. Then following in order would be: Eastward Expansion Snack Foods Southward Expansion Inventory Control System Artificial Sweeteners New Plant Expanded Plant Automation and Conveyor System Expand Truck Fleet Effluent Treatment Program (which has no NPV) While the Effluent Treatment Program has no formal NPV it can be considered an investment of 4M now to save a cost of 10M in 4 years. Question 3 a. What aspects of the projects might invalidate the ranking you just derived? There are many aspects that could invalidate the simple NPV analysis of the projects. They include Risk Political considerations Regulatory issues including health, safety and environmental Incompatibility with corporate strategy Resource availability
- 4. b. How should we correct for each investment’s time value of money, unequal lifetimes, riskiness, and size? Different analysis techniques and different assumptions can be used to correct for the various factors that affect each project differently. For example: The time value of money reliable measures are discounting methods such as NPV or IRR. Unequal lifetimes of the projects are solved using Equivalent Annuities. Risk can be dealtwith by increasing the hurdle rate. Different project sizes can be can be measured by multiplying the NPV by the ratio of the size of the projects or by using a profitability ratio. Question 4 Reconsider the projects in terms of: a. Are any “must do” projects of the nonnumeric type? The Effluent project is a must do project. The Automation and Conveyor Systems might be a must do since it is a health hazzard to employees. These impose both safety and environmental issues. b. What elements of the projects might imply greater or lesser riskiness? Answer: Projects that involve small technology changes like expanding the truck fleet would have low risk. Increasing levels of technological sophistication such as automation or introducing artificial sweeteners into products would also increase implementation risks. Another risk area for any producer in a capitalist environment is attempting to increase markets with new products in new areas. The prospective customers may simply choose to not buy the product. Other elements of risk include project size, complexity and length of the period of return. c. Might there be any synergies or conflicts between the projects? Answer:There are real synergies between the plant expansion/additions, automation, truck upgrade and the geographic expansion projects. d. Do any of the projects have nonquantitativebenefits or costs that should be considered in an evaluation? Answer: Projects that have nonquantitative costs and benefits would include: Projects that impact the company’s regulator compliance such as effluent treatment (environment) and warehouse automation (safety). Several of the projects could impact the company’s image. For example, the snack food rollout could be positive because of its wholesome connotations while
- 5. the acquisition of the schnapps brand could be negative. The effluent project could be positive by showing the company’s willingness to act on environmental concerns early. Similarly the automation project could be cast a positive step towards increased safety. The plant expansion project may be positive or negative depending on whether the community reacts to new jobs or factory encroachment. Question 5 Considering all the above, what screens/factors might you suggest to narrow down the set of most desirable projects? 1) I would recommend four screens be applied using the following factors: Does the project incurr a high cost? Exceeds Tolerable Cost Value Is the project a “Mandatory”? Options – Yes/No Does the project meet minimum IRR? Options –Ok/Not Ok Does the project meet maximum payback period? Options –Ok/Not Ok Does the project incur high risk? Options –Ok/Not Ok Does the project meet the current corporate strategy? Options –Ok/Not Ok What criteria would you use to evaluate the projects on these various factors? 2) Using these screens and criteria the following projects would be eliminated outright: Truck Fleet (1) because it does not meet the minimum IRR and exceeds the maximum payback period dictated by company policy. New Plant (2), Plant Expansion (3), Artificial Sweetener (4) and Plant Automation (5) all because they exceed the maximum payback period dictated by company policy. Strategic Acquisition (11) and Artificial Sweetener (4) would both be eliminated due to excessive risk.
- 6. Strategic Acquisition (11) would also be eliminated because it does not match the current strategy Strategic Acquisition(11) eliminated due to high cost. Question 6:Divide the projects into the four Project Profi le Process categories of incremental, platform, breakthrough, and R&D. Draw an aggregate project plan and array the projects on the chart. No Project Name Cost Aggregate 1 Expland Truck Fleet 22 Platform - major departures 2 New Plant 30 Platform - major departures 3 Expanded Plant 10 Derivative - incremental 4 Artificial Sweetner 15 R&D– long 10 2 1 3 5 4 6 11 9 7 8
- 7. 5 Automation and Conveyor 14 Derivative – incremental (completed quickly) 6 Effluent Treatment 4 Derivative– incremental(completed quickly) 7 Eastward Expansion 20 Platform - major departures 8 Southward Expansion 20 Platform - major departures 9 Snack Foods 18 Platform - major departures 10 Inventory Control 15 Breakthrough 11 Strategic Acquisition 40 Platform Derivative –Add ons or minor enhancements to existing systems. Clearly bounded and require few development resources. Completed quickly. Platform - Cros between derivative and breakthrough. More technology change than derivative but not completely new,untried systems like breakthrough. Fundmanetal improvements over range of performance dimensions(Speed, functionality, reliability, etc) rather than just one or two. Designed for future expansion. Breakthrough Projects – Signficant changes to both technology and business processes. Establish new core systems that fundamentalyy from previous. Large degree of change in many functional areas. Require large resources allocation and heavy management involvement. R&D Proejcts– Takes the longes time to finish. Question 7: Based on all the above, which projects should the management committee recommend to the Board of Directors? The following projects should be recommended based on table below. 1. Effluent Treatment 2. Eastward Expansion 3. Southward Expansion 4. Snack Foods 5. Inventory Control No Project Name Classification Cos t Mandator y IRR Paybac k Risk Strateg y Investmen t 1 Expland Truck Fleet Efficiency and Expansion 22 No Not Ok - 7.8% Not Ok Ok Ok 2 New Plant Market Extension 30 No Ok - 11.3% Not Ok Ok Ok 3 Expanded Plant Market Extension 10 No Ok - 11.2% Not Ok Ok Ok 4 Artificial Sweetner New Product Category 15 No Ok - 17.3% Not Ok Not Ok Ok 5 Automation and Conveyor Efficiency 14 No Ok - 8.7% Not Ok Ok Ok 6 Effluent Treatment Environmental 4 Yes n/a n/a n/a n/a 4 7 Eastward Expansion New Market 20 No Ok - 21.4% Ok Ok Ok 20 8 Southward Expansion New Market 20 No Ok - 18.8% Ok Ok Ok 20 9 Snack Foods New Product Category 18 No Ok - 20.5% Ok Ok Ok 18 10 Inventory Control Efficiency 15 No Ok - 16.2% Ok Ok Ok 15 11 Strategic Acquisition New Product Category 40 No Ok -28.7% Ok Not Ok Not Ok Total Cost 77