As executive management of Euroland Foods, our goal is to decide on the most beneficial mix of eleven potential projects. The proposed projects focus on market extension, company expansion, increasing efficiency, and the development of a new product. While the total cost of all projects would be EUR 316 million, the budget is EUR 120 million meaning not all the projects can be undertaken. The key factors, among others, we used in order to decide the most fitting proposals were cost, risk-level, payback period and internal rate of return.
After evaluating these attributes we decided to endorse and invest in five projects: plant expansion, plant automation and conveyor systems, southward market expansion, effluent-water treatment at four plants, and network, computer-based inventory control system for warehouses and field representatives. The first capital project of plant expansion is to increase capacity at the Nouremburg, Germany facility. This plant has been experiencing issues in meeting deadlines and timeliness due to a lack of capacity.
If these issues were to go unresolved the company’s reputation may be tarnished. This facility has produced many of Euroland Food’s of key products such as their juices, and bottled water. With an increase in capacity an increase in productivity would follow with an internal rate of return of up to 11. 2%. Inherent in these changes is the potential for greater efficiency as well. The next capital project to invest in is plant automation and conveyor systems. This project was proposed by Maarten Leyden who has past experience and expertise in production-cost control.
His past success in the area leads us to believe this is the correct step in advancing production. These new systems would be added to six of the slower, less efficient plants. Euroland currently has two newer plants that have already implemented such a system and these facilities have shown an increase in speed of production. The most basic benefits of this project are increased production and efficiency, which may lead to a more efficient market distribution. These new conveyor systems decrease the need for manual labor resulting in less accidents and spillage.
Euroland will save approximately EUR 150,000 a year due to the decrease in accidents, which comes from not having to pay as many employees for injury related absence. It is the company’s responsibility to do all in its power to ensure the safety of their employees and this would be a great step in that direction. The internal rate of return on this project is estimated at 8. 7%. This rate of return is higher than the required rate on efficiency intensive projects by . 7%.
Another proposal that will be implemented is a southward market expansion, which was suggested by Marco Ponti. The southern region consisting of France, Switzerland, Italy and Spain, is not yet saturated with competitors, presenting the potential for a very successful expansion. Establishing a customer base The IRR for this project is well above the minimum of 12% potentially reaching 21. 4%. This may be the riskiest venture of the group but because of that can yield such a high return. The high risk will be balanced by the low risk of the other projects. Mr.
Ponti has shown success in increasing sales and we expect this project to do so by establishing a strong customer base in these areas where the customers exhibit high purchasing power. Mr. Leyden proposed another project that will be undertaken consisting of effluent-water treatment at four plants. This is not only due to eventual regulation from the European Community but the company also has the social responsibility to reduce its waste and help preserve the environment. The company could also potentially face bad press if it obtains an image as a wasteful, polluting company.
It is the company’s best interest to implement such a system sooner rather than later. Being environmentally responsible will prove beneficial from a marketing aspect with the current trend towards a more “green” lifestyle. The final project to be implemented is a network, computer-based inventory-control system for warehouses and field representatives. The benefits of such a system are shorter delays in ordering and order processing, more efficient inventory control, and reduced spoilage. Changes in market demand will be more easily recognized and measured resulting in a better-prepared reaction by the company.
The internal rate of return is projected to be 16. 2%, which is well about the required minimum. The total expenditure for the five projects will be EUR 94. 5 million, which is EUR 25. 5 million below the spending limit. Because there was EUR 25. 5 million not spent, this may potentially be used towards one of the other projects in the future if the company has the means. Overall, these five projects will increase productivity, sales, and efficiency and a decrease in cost. These projects are thecorrect path for Euroland Foods for the near future in order to increase overall profitability.