Pan-Europa Foods S.A

Abstract

In January 1993, the senior management committee of this company has to decide which major projects the company should fund for immediate implementation. The board of directors arbitrarily set a limit of European currency units (ECU) at 80 million to spend on capital projects in 1993. But various managers have proposed projects totaling ECU208 million. Students must evaluate the completed discounted cash flow (DCF) analyses presented along with qualitative factors (mainly the strategic considerations and the internal politics of the company) and choose the projects to be approved.

Excerpt

UVA-F-1028

PAN-EUROPA FOODS S.A.

In early January 1993, the senior management committee of Pan-Europa Foods was to meet to draw up the firm's capital budget for the new year. Up for consideration were 11 major projects that totaled over (European Currency Unit) ECU208 million. Unfortunately, the board of directors had imposed a spending limit of only ECU80 million; even so, investment at that rate would represent a major increase in the firm's asset base of ECU656 million. Thus, the challenge for the senior managers of Pan-Europa was to allocate funds among a range of compelling projects: new product introduction, acquisition, market expansion, efficiency improvements, preventative maintenance, safety, and pollution control.

The Company

Pan-Europa Foods, headquartered in Brussels, Belgium, was a multinational producer of high-quality ice cream, yogurt, bottled water, and fruit juices. Its products were sold throughout Scandinavia, Britain, Belgium, the Netherlands, Luxembourg, western Germany, and northern France. (See Exhibit 1 for a map of the company's marketing region.)

The company was founded in 1924 by Theo Verdin, a Belgian farmer, as an offshoot of his dairy business. Through keen attention to product development, and shrewd marketing, the business grew steadily over the years. The company went public in 1979 and by 1993 was listed for trading on the London, Frankfurt, and Brussels exchanges. In 1992, Pan-Europa had sales of almost ECU1.1 billion.

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Keywords: capital budgeting, budget, cash flow, internal rate of return, IRR, intrapersonal behavior, resource allocation, diversity, strategic planning, international