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Facing strong pressure from investors to improve financial performance and preserve capital, senior management at Euroland Foods must select which projects to fund across a slate of major investment proposals for 2021. While the board of directors has imposed a limit of EUR120 million for the company budget, various managers have proposed projects totaling EUR316 million. The task for students is to evaluate each proposal’s financial attributes and qualitative factors (mainly strategic considerations and internal company politics), then choose the projects to be approved. This case presents two alternative modes of delivery: (1) a standard case discussion; or (2) a role-play exercise with a debriefing. The teaching note includes role-playing character descriptions for distribution to students and describes both modes of delivery. The different viewpoints of the company managers featured in these character descriptions is a unique aspect of this case, which affords students the opportunity to grapple with some aspects of capital budgeting that they don’t normally encounter. The multifunctional aspect of this case affords an opportunity for a finance instructor to coteach it with an organizational behavior instructor. Points of linkage are in the areas of group leadership and the assessment and management of group decision-making processes. The case is suitable for intermediate corporate finance courses.
In descending order of importance, this case is designed to meet the following teaching objectives: 1) Explore the problem of resource allocation within corporations. By looking at many projects and with insights into the contrasting senior management perspectives, this case is a useful complement to other capital-budgeting cases that focus on single projects. 2) 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. 3) Exercise and interpret the implications of classic tools of investment analysis (e.g., net present value, internal rate of return, payback), and 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). 4) 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 effects of those conflicts and provides some insights into remedies.