Product Overview

Britannia Chemicals was under pressure from investors to improve its financial performance because of the accumulation of the firm’s common shares by a well-known corporate raider. Earnings had fallen to 180 pence per share at the end of 2017 from around 250 pence per share at the end of 2016. This B case reviews the same project as the A case (F-1906) but from one level higher: the executive vice president faces an either/or investment decision between two mutually exclusive projects. The case explores aspects related to identifying incremental cash flow implications of investment decisions and evaluating related financial criteria, including impact on earnings per share, payback, and net present value, and internal rate of return.

Learning Objectives

The objective of this B case is to expose students to a wide range of capital-budgeting issues. They will consider the following: 1) the relevance of cash flows from assets that might be separable from the core project; 2) the classic crossover problem, in which project rankings disagree on the basis of net present value (NPV) and internal rate of return (IRR); 3) the use of arbitrary hurdle rates to reflect additional non-business risk in projects; 4) the assessment of real option value latent in managerial flexibility to change operating technologies; 5) the identification of some classic games or types of human behavior that can be counterproductive in the resource-allocation process