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Guide Questions 1) What are the investment measures in case Exhibit 3 and what

Guide Questions 1) What are the investment measures in case Exhibit 3 and what do they measure? Investment Measures What do they measure? IRR Measures the profitability of potential investment. Payback Measures the length of time that it takes for a project to recover its initial cost from the net cash inflows that it generates. Sometimes referred as “the time that it takes for an investment to pay for itself.” 2) 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? IRR Advantages Disadvantages a) Simplicity a) Ignores the size of the project b) The timing of cash flow is considered b) Ignores reinvestment rates c) Ignores Future Costs d) Hurdle Rate is not required Payback Advantages Disadvantages a) Simplicity a) No risk adjustment b) Provide information about how long funds will be tied up in a project b) Ignores cash flows beyond the payback period c) Shorter the payback, the greater the project's liquidity c) Ignores time value of money d) Is often important to new companies that are "cash poor" 3) Please rank the 11 proposals on the basis of purely economic consideration Ranked by IRR Ranked by Payback Ranked by Profitability Index Acquisition 60M 15.50 % Inventory Control 22.5M 3 Acquisition 60M 3.39 % Effluent Water 6M 15.10 % Effluent Water 6M 4 Effluent Water 6M 1.67 % Go Southward 30M 9.40 % Acquisition 60M 5 Go Southward 30M 1.5% Inventory Control 22.5M 8.20 % Artificial Sweetener 27M Inventory Control 22.5M 1.15 % T otal 118.5 M Go Southward 30M T otal 118.5M Go Eastward 30M 4) Rank the proposals a second time bases on any other considerations that you believed that important. Project Benefits Investment Cost 1) Effluent Water a) Protecting present market share b) Environmental category c) Building a good reputation 6M 2) Replacement and Expansion of the Truck Fleet a) 15 % increase in cubic meters of goods hauled on each trip b) The new tractors would also be more fuel and maintenance efficient c) The increase in the number of trucks would permit it more flexible scheduling and more efficient and will cut delivery times (possibly inventories) d) Support geographical expansion over long term 33M 3) Plant Automation and Conveyer Systems a) Reduced the chance of injury by employees b) Improved throughout speed 21M 4) Development and Introduction of New Artificial Sweetener a) Growing demand for low calorie products b) Protecting of present market share c) Prevent brand suffering 27M 5) Inventory Control a) Shorter delays in ordering and order processing b) Better control of inventory c) Reduction of spoilage d) Faster recognition of changes in demand at the customer level 22.5M TOTAL: 109.5M 5) Are the rankings identical? Why or why not? 6) Which set of projects should Verdin recommend to the board of Euroland Foods for the capital budget of 2001? uploads/Finance/ guide-questions.pdf