Product Overview

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 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 presented along with qualitative factors (mainly strategic considerations and internal politics of the company), and to choose the projects to be approved.

Learning Objectives

The main objectives of this case are to explore the problem of resource allocation within corporations; illustrate and assess the impact of capital rationing on capital investment decisions; exercise and interpret the implications of classic tools of investment analysis (for example, net present value [NPV], internal rate of return [IRR], payback), and to consider possible adjustments for differences among the projects in risk (for example, through the use of risk-adjusted discount rates), size (for example, through the profitability index), and life (for example, through using equivalent annuities, replacement chains, or both); and 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 remedies.