Target Corporation
EUROLAND FOODS S.A.
Teaching Note
Synopsis and Objectives
Suggestions for complementary cases on measures of investment analysis: “The Investment Detective” (Case 17); corporate resource allocation: “Victoria Chemicals (A) and (B)” (Cases 22 and 23); “Target Corporation” (Case 19).
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 (euros) EUR120 million to be spent on capital projects in 2001. Various managers, however, have proposed projects totaling EUR316 million. The task for the student is to evaluate the completed discounted cash flow (DCF) analyses which …show more content…
By looking at many projects and the senior-management perspective, this case is a useful complement to other capital-budgeting cases that focus on single projects.
• To illustrate and assess the impact of capital rationing on capital investment decisions. The results usually reveal selection of economically suboptimal capital budgets. How this selection arises is an important learning point (see Exhibit TN1, which is suitable for the basis of a minilecture).
• To exercise and interpret the implications of classic tools of investment analysis (e.g., net present value [NPV], internal rate of return [IRR], payback), and to consider possible adjustments for differences among the projects in risk (e.g., through the use of risk-adjusted discount rates), size (e.g., through the profitability index), and life (e.g., through using equivalent annuities, replacement chains, or both).
• To consider the impact of behavioral influences on financial decision making. The roles in this case are overlaid with numerous possible conflicts among the decision makers: cross-cultural, cross-functional, and political. The case illustrates the potential effect of those conflicts, and provides some insights into …show more content…
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?
2. Please rank the 11 proposals on the basis of purely economic considerations. Then rank them a second time based on any other considerations that you believe are important. Are the rankings identical? Why or why not?
3. Which set of projects should Wilhelmina Verdin recommend to the board of Euroland Foods for the capital budget for 2001?
In some class settings, discussion of this case will be enhanced by assigning background readings on the actual resource-allocation practices of managers. Some useful readings include:
Gitman, L.J., and V. A. Mercurio. “Cost of Capital Techniques used by Major U.S. Firms: Survey and Analysis of Fortune’s 1000.” Financial Management (winter 1982): 21–29.
Gitman, L.J., and P. A. Vandernberg. “Cost of Capital Techniques used by Major U.S. Firms: 1997 vs. 1980.” Financial Practice and Education (winter 2000):
Teaching Note
Synopsis and Objectives
Suggestions for complementary cases on measures of investment analysis: “The Investment Detective” (Case 17); corporate resource allocation: “Victoria Chemicals (A) and (B)” (Cases 22 and 23); “Target Corporation” (Case 19).
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 (euros) EUR120 million to be spent on capital projects in 2001. Various managers, however, have proposed projects totaling EUR316 million. The task for the student is to evaluate the completed discounted cash flow (DCF) analyses which …show more content…
By looking at many projects and the senior-management perspective, this case is a useful complement to other capital-budgeting cases that focus on single projects.
• To illustrate and assess the impact of capital rationing on capital investment decisions. The results usually reveal selection of economically suboptimal capital budgets. How this selection arises is an important learning point (see Exhibit TN1, which is suitable for the basis of a minilecture).
• To exercise and interpret the implications of classic tools of investment analysis (e.g., net present value [NPV], internal rate of return [IRR], payback), and to consider possible adjustments for differences among the projects in risk (e.g., through the use of risk-adjusted discount rates), size (e.g., through the profitability index), and life (e.g., through using equivalent annuities, replacement chains, or both).
• To consider the impact of behavioral influences on financial decision making. The roles in this case are overlaid with numerous possible conflicts among the decision makers: cross-cultural, cross-functional, and political. The case illustrates the potential effect of those conflicts, and provides some insights into …show more content…
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?
2. Please rank the 11 proposals on the basis of purely economic considerations. Then rank them a second time based on any other considerations that you believe are important. Are the rankings identical? Why or why not?
3. Which set of projects should Wilhelmina Verdin recommend to the board of Euroland Foods for the capital budget for 2001?
In some class settings, discussion of this case will be enhanced by assigning background readings on the actual resource-allocation practices of managers. Some useful readings include:
Gitman, L.J., and V. A. Mercurio. “Cost of Capital Techniques used by Major U.S. Firms: Survey and Analysis of Fortune’s 1000.” Financial Management (winter 1982): 21–29.
Gitman, L.J., and P. A. Vandernberg. “Cost of Capital Techniques used by Major U.S. Firms: 1997 vs. 1980.” Financial Practice and Education (winter 2000):