Project Management

Strategically, what must Organic do to keep from becoming the victim of a hostile takeover? (10 points) What rows/ categories in Exhibit 2 will thus become

critically important in 1993? (10 Points)

Using NPV, conduct a straight financial analysis of the investment alternatives and rank the projects. (30 points). What is the best and worst project to

take? (10 points)

What aspects of the projects might invalidate the ranking you just derived? (10 Points)

Divide the projects into the four Project Profile Process categories of incremental, platform, breakthrough, and R&D. Draw an aggregate project plan and

array the projects on the chart. (20 points)

Based on all the above, which projects should the management committee recommend to the Board of Directors? (10 Points)
Assessment 1
Assessment Type Individual Report
Unit Title Project Management
Unit Code BSS011-2 Number of Credits 15
Unit Coorniator Dr. Sara Hasani
Assessment Weighting (%) 50%
Submission Deadline 30th May
Procedure for/where to submit work (including file name format for TurnItIn where applicable) 1) Submission Procedures:
You are required to submit electronicallythroughBREO Turn-it-in link by 13:00 on 30th May
The following file naming format should be used for submission:
Assessment1_ student surname_student ID
E.g: Assessment 1
2) Word Limit:1500 words(+/- 10%)
3) Report Format:Business Report Format
It is suggested that you use the following format
• The report should have a professional format (e.g. title page, executive summary, table of content, subtitles, conclusions and recommendations,

appendices, etc.).
• The report should be 1.5 line-spaced, 12 point font, Times New Roman, or Arial.
• Each page should be numbered

Description of
Assessment Task
• Strategically, what must Organic do to keep from becoming the victim of a hostile takeover? (10 points) What rows/ categories in Exhibit 2 will

thus become critically important in 1993? (10 Points)

• Using NPV, conduct a straight financial analysis of the investment alternatives and rank the projects. (30 points). What is the best and worst

project to take? (10 points)

• What aspects of the projects might invalidate the ranking you just derived? (10 Points)

• Divide the projects into the four Project Profile Process categories of incremental, platform, breakthrough, and R&D. Draw an aggregate project

plan and array the projects on the chart. (20 points)

• Based on all the above, which projects should the management committee recommend to the Board of Directors? (10 Points)

Unit Learning Outcomes assessed: • Demonstrate an in depth of knowledge, application and systematic understanding of theory & tools
• Apply and critically evaluate quality frameworks and tools in project management and business management cases
• Demonstrate a depth of knowledge and systematic understanding of applicable standards
Presentation Format Word Document
Assessment Criteria Marking grid will be provided detailing assessment criteria

Marking Scheme:

Marking Scheme %
Excellent
A (14-16) Good
B (11-13) Fair
C (8-10) Weak
D (5-7) Poor
E or below
(0-4)
Application of course concepts, and evidence of background reading and research (including literature review). 40 Very Good literature review in

connection to one theory with at least 5 references to textbook and website material Good literature review, theory might not being stated but at least

3 references given one of which from the textbook Fair literature review, with at least two website reference Some review with no logical

interrelation between the discussions Barely any investigation into the background
Discussion and analysis of key issues in the case, and solutions 40 Answering all the questions discussing at least two alternatives in their

reasoning Answering all the question with at least one logical reasoning Answering two questions with logical reasoning Answering one questions

reasonably and the rest some rough ideas No reasoning and no ideas of their own
Coherent argument, logical structure, overall presentation of the report, and referencing 20 Well structured arguments with good design of the

sections with well structure diagrams and flow of the report Well structured arguments and design with reasonable flow of the report Fair

structure and design Poor structure and design with a reasonable flows of ideas Lack of all the above

CASE STUDY- ORGANIC COMPANY
The following case concerns a European firm trying to choose between almost a dozen capital investment projects being championed by different executives in

the firm. However, there are many more projects available for funding than there are funds available to implement them, so the set must be narrowed down to

the most valuable and important to the firm. Finan-cial, strategic, and other data are given concerning the projects in order to facilitate the analysis

needed to make a final in-vestment recommendation to the Board of Directors.

In early January 1993, the senior-management commit-tee of Organic Foods was to meet to draw up the firm’s capital budget for the new year. Up for

consideration were 11 major projects that totaled over :208 mil-lion (euros). Unfortunately, the board of directors had imposed a spending limit of only

:80 million; even so, investment at that rate would represent a major increase in the firm’s asset base of :656 million. Thus the challenge for the senior

managers of Organic was to allocate funds among a range of compelling projects:

EXHIBIT 1 Organic Foods S. A. Nations Where Organic Competed

Note: The shaded area in this map reveals the principal distribution region of Organic’s products. Important facilities are indicated by the following

figures:
1. Headquarters, Brussels, Belgium 6. Plant, Copenhagen, Denmark
2. Plant, Antwerp, Belgium 7. Plant, Svald, Sweden
3. Plant, Strasbourg, France 8. Plant, Nelly-on-Mersey, England
4. Plant, Nuremberg, Germany 9. Plant, Caen, France
5. Plant, Hamburg, Germany 10. Plant, Melun, France
Organic sales had been static since 1990 (see Exhibit 2), which management attributed to low population growth in northern Europe and market saturation in

some areas. Outside observers, however, faulted recent
failures in new-product introductions. Most members of management wanted to expand the company’s mar-ket presence and introduce more new products to boost

sales.

EXHIBIT 2 Summary of Financial Results (all values in: millions except per-share amounts)

Fiscal Year Ending December 31

1990 1991 1992

Gross sales 1,076 1,072 1,074
Net income 51 49 37
Earnings per share 0.75 0.72 0.54
Dividends 20 20 20
Total assets 477 580 656
Shareholders’ equity 182 206 235
(book value)
Shareholders’ equity 453 400 229
(market value)

These managers hoped that increased market pres-ence and sales would improve the company’s market value. Organic’s stock was currently at eight times

earnings, just below book value. This price/earnings ratio was below the trading multiples of comparable compa-nies, but it gave little value to the

company’s brands.

Resource Allocation

The capital budget at Organic was prepared annually by a committee of senior managers who then presented it for approval by the board of directors. The

commit-tee consisted of five managing directors, the présidentdirecteur-général (PDG), and the finance director. Typi-cally, the PDG solicited investment

proposals from the managing directors. The proposals included a brief proj-ect description, a financial analysis, and a discussion of strategic or other

qualitative considerations.
As a matter of policy, investment proposals at Organic were subjected to two financial tests, payback and internal rate of return (IRR). The tests, or

hurdles, had been established in 1991 by the management com-mittee and varied according to the type of project:

Maximum
Minimum Acceptable
Acceptable Payback
Type of Project IRR Years

1. New product or new markets 12% 6 years
2. Product or market extension 10% 5 years
3. Efficiency improvements 8% 4 years
4. Safety or environmental No test No test
In January 1993, the estimated weighted-average cost of capital (WACC) for Organic was 10.5 percent. In de-scribing the capital-budgeting process, the

finance director, Trudi Lauf, said, “We use the sliding scale of IRR tests as a way of recognizing differences in risk among the various types of projects.

Where the company takes more risk, we should earn more return. The payback test signals that we are not prepared to wait for long to achieve that return.”

Ownership and the Sentiment of

Creditors and Investors

Organic’s 12-member board of directors included three members of the Verdin family, four members of management, and five outside directors who were promi-

nent managers or public figures in northern Europe. Mem-bers of the Verdin family combined owned 20 percent of Organic’s shares outstanding, and company

executives owned 10 percent of the shares. Venus Asset Manage-ment, a mutual-fund management company in London, held 12 percent. Banque du Bruges et des

Pays Bas held 9 percent and had one representative on the board of direc-tors. The remaining 49 percent of the firm’s shares were widely held. The firm’s

shares traded in London, Brus-sels, and Frankfurt.

At a debt-to-equity ratio of 125 percent, Organic was leveraged much more highly than its peers in the European consumer-foods industry. Management had

re-lied on debt financing significantly in the past few years to sustain the firm’s capital spending and dividends dur-ing a period of price wars initiated

by Organic. Now, with the price wars finished, Organic’s bankers (led by Banque du Bruges) strongly urged an aggressive pro-gram of debt reduction. In any

event, they were not pre-pared to finance increases in leverage beyond the current level. The president of Banque du Bruges had remarked at a recent board

meeting,

Restoring some strength to the right-hand side of the balance sheet should now be a first priority. Any expansion of assets should be financed from the

cash flow after debt amortization until the debt ratio returns to a more prudent level. If there are crucial investments that cannot be funded this way,

then we should cut the dividend!

At a price-to-earnings ratio of eight times, shares of Organic common stock were priced below the average multiples of peer companies and the average

multiples of all companies on the exchanges where Organic was traded. This was attributable to the re-cent price wars, which had suppressed the company’s

profitability, and to the well-known recent failure of the company to seize significant market share with a new product line of flavored mineral water.

Since Janu-ary 1992, all of the major securities houses had been issuing “sell” recommendations to investors in Organic shares. Venus Asset Management in

London had quietly accumulated shares during this period, however, in the expectation of a turnaround in the firm’s performance. At the most recent board

meeting, the senior managing director of Venus gave a presenta-tion in which he said,

Cutting the dividend is unthinkable, as it would signal a lack of faith in your own future. Selling new shares of stock at this depressed price level is

also unthinkable, as it would impose unacceptable dilution on your current shareholders. Your equity investors expect an improvement in performance. If

that improvement is not forthcoming, or worse, if investors’ hopes are dashed, your shares might fall into the hands of raiders like Carlo de Bene-detti or

the Flick brothers.1

At the conclusion of the most recent meeting of the directors, the board voted unanimously to limit capital spending in 1993 to :80 million.

The Expenditure Proposals

The forthcoming meeting would entertain the following proposals:
Region of the company’s market were about to exceed the capacity of its Melun, France, manufacturing and pack-aging plant.

Expenditure
Project (€ millions) Sponsoring Manager

1. Replacement and expansion of the truck fleet 22 Klink, Distribution
2. A new plant 30 Leyden, Production
3. Expansion of a plant 10 Leyden, Production
4. Development and introduction of new 15 Morin, Marketing
artificially sweetened yogurt and ice cream
5. Plant automation and conveyor systems 14 Leyden, Production
6. Market expansion eastward 20 Ponti, Sales
7. Market expansion southward 20 Ponti, Sales
8. Development and roll-out of snack foods 18 Morin, Marketing
9. Networked, computer-based inventory-control 15 Klink, Distribution
system for warehouses and field representatives
10. Acquisition of a leading schnapps brand and 40 Humbolt, Strategic
associated facilities Planning
1. Replacement and expansion of the truck fleet. HeinzKlink proposed to purchase 100 new refrigerated tractor-trailer trucks, 50 each in 1993 and

1994. By doing so, the company could sell 60 old, fully depreciated trucks over the two years for a total of :1.2 million. The purchase would expand the

fleet by 40 trucks within two years. Each of the new trailers would be larger than the old trail-ers and afford a 15 percent increase in cubic meters of

goods hauled on each trip. The new tractors would also be more fuel and maintenance efficient. The increase in number of trucks would permit more flexible

scheduling and more efficient routing and servicing of the fleet than at present and would cut delivery times and, therefore, possibly inventories. It

would also allow more frequent deliveries to the company’s major markets, which would reduce the loss of sales caused by stock-outs. Finally, ex-panding

the fleet would support geographical expansion over the long term. As shown in Exhibit 3, the total net investment in trucks of :20 million and the

increase in working capital to support added maintenance, fuel, pay-roll, and inventories of :2 million was expected to yield total cost savings and added

sales potential of :7.7 mil-lion over the next seven years. The resulting IRR was es-timated to be 7.8 percent, marginally below the minimum 8 percent

required return on efficiency projects. Some of the managers wondered if this project would be more properly classified as “efficiency” than “expansion.”

2. A new plant. Maarten Leyden noted that Organic’s yogurt and ice-cream sales in the southeasternefficient facility, located in Strasbourg, France.

Shipping costs over that distance were high, however, and some sales were undoubtedly being lost when the marketing effort could not be supported by

delivery. Leyden pro-posed that a new manufacturing and packaging plant be built in Dijon, France, just at the current southern edge of Organic’s marketing

region, to take the burden off the Melun and Strasbourg plants.The cost of this plant would be :25 million and would entail :5 million for working capital.

The :14 million worth of equipment would be amortized over seven years, and the plant over ten years. Through an increase in sales and depreciation, and

the decrease in delivery costs, the plant was expected to yield after-tax cash flows totaling :23.75 million and an IRR of 11.3 percent over the nextten

years. This project would be classified as a market extension.

3. Expansion of a plant. In addition to the need for greater production capacity in Organic’s southeastern region, its Nuremberg, Germany, plant had

reached full capacity. This situation made the scheduling of routine equipment maintenance difficult, which, in turn, created production-scheduling and

deadline problems. This plant was one of two highly automated facilities that produced Organic’s entire line of bottled water, mineral water, and fruit

juices. The Nuremberg plant supplied central and western Europe. (The other plant, near Copenhagen, Denmark, supplied Organic’s northern European markets.)

The Nuremberg plant’s capacity could be expanded by 20 percent for :10 million. The equipment (:7 million) would be depreciated over seven years, and the

plant over ten years. The increased capacity was expected to result in additional production of up to :1.5 million per year, yielding an IRR of 11.2

percent. This project would be classified as a market extension.

4. Development and introduction of new artificially sweetened yogurt and ice cream. Fabienne Morin notedthat recent developments in the synthesis of

artificial sweeteners were showing promise of significant cost savings to food and beverage producers as well as stimu-lating growing demand for low-

calorie products. The challenge was to create the right flavor to complement or enhance the other ingredients. For ice-cream manufac-turers, the difficulty

lay in creating a balance that would result in the same flavor as was obtained when using nat-ural sweeteners; artificial sweeteners might, of course,

create a superior taste. :15 million would be needed to commercialize a yo-gurt line that had received promising results in laboratory tests. This cost

included acquiring specialized produc-tion facilities, working capital, and the cost of the initial product introduction. The overall IRR was estimated to

be 17.3 percent. Morin stressed that the proposal, although highly un-certain in terms of actual results, could be viewed as a means of protecting present

market share, because other high-quality ice-cream producers carrying out the same research might introduce these products; if the Rolly brand did not

carry an artificially sweetened line and its competitors did, the Rolly brand might suffer. Morin also noted the parallels between innovating with

artificial sweeteners and the company’s past success in introduc-ing low-fat products. This project would be classed in the new-product category of

investments.

5. Plant automation and conveyor systems. MaartenLeyden also requested :14 million to increase auto-mation of the production lines at six of the

company’s older plants. The result would be improved through-out speed and reduced accidents, spillage, and pro-duction tie-ups. The last two plants the

company had built included conveyer systems that eliminated the need for any heavy lifting by employees. The systems reduced the chance of injury to

employees; at the six older plants, the company had sustained an average of 75 missed worker-days per year per plant in the last two years because of

muscle injuries sustained in heavy lifting. At an average hourly wage of :14.00 per hour, over :150,000 per year was thus lost, and the possibility always

existed of more serious injuries and lawsuits. Overall cost sav-ings and depreciation totaling :2.75 million per year for the project were expected to

yield an IRR of 8.7 percent. This project would be classed in the efficiency category.

6 and 7. Market expansions eastward and southward. Marco Ponti recommended that the company expand its market eastward to include eastern Germany, Poland,

Czechoslovakia, and Austria and/or southward to include southern France, Switzerland, Italy, and Spain. He believed the time was right to expand sales of

ice cream, and per-haps yogurt, geographically. In theory, the company could sustain expansions in both directions simultaneously, but practically, Ponti

doubted that the sales and distribution organizations could sustain both expansions at once. Each alternative geographical expansion had its ben-efits and

risks. If the company expanded eastward, it could reach a large population with a great appetite for frozen dairy products, but it would also face more

com-petition from local and regional ice cream manufactur-ers. Moreover, consumers in eastern Germany, Poland, and Czechoslovakia did not have the

purchasing power that consumers did to the south. The eastward expansion would have to be supplied from plants in Nuremberg, Strasbourg, and

Hamburg.Looking southward, the tables were turned: more purchasing power and less competition but also a smaller consumer appetite for ice cream and

yogurt. A southward expansion would require building consumer demand for premium-quality yogurt and ice cream. If neither of the plant proposals (i.e.,

proposals 2 and 3) were accepted, then the southward expansion would need to be supplied from plants in Melun, Strasbourg, and Rouen.The initial cost of

either proposal was :20 million of working capital. The bulk of this project’s costs was expected to involve the financing of distributorships, but over

the ten-year forecast period, the distributors would gradually take over the burden of carrying receivables and inventory. Both expansion proposals assumed

the rental of suitable warehouse and distribution facilities. The after-tax cash flows were expected to total :37.5 million for eastward expansion and

:32.5 million for southward expansion.Marco Ponti pointed out that eastward expansion meant a higher possible IRR but that moving southward was a less

risky proposition. The projected IRRs were 21.4 percent and 18.8 percent for eastern and southern expansion, respectively. These projects would be classed

in the new market category.

8. Development and roll-out of snack foods. Fabi-enne Morin suggested that the company use the excess capacity at its Antwerp spice- and nut-

processing facil-ity to produce a line of dried fruits to be test-marketed in Belgium, Britain, and the Netherlands. She noted the strength of the Rolly

brand in those countries and the success of other food and beverage companies that had expanded into snack-food production. She argued that Organic’s

reputation for wholesome, quality prod-ucts would be enhanced by a line of dried fruits and that name association with the new product would probably even

lead to increased sales of the company’s other prod-ucts among health-conscious consumers.Equipment and working-capital investments were ex-pected to total

:15 million and :3 million, respectively, for this project. The equipment would be depreciated over seven years. Assuming the test market was success-ful,

cash flows from the project would be able to support further plant expansions in other strategic locations. The IRR was expected to be 20.5 percent, well

above the re-quired return of 12 percent for new-product projects.

9. Networked, computer-based inventory-control system for warehouses and field representatives. HeinzKlink had pressed for three years unsuccessfully

for a state-of-the-art computer-based inventory-control sys-tem that would link field sales representatives, distribu-tors, drivers, warehouses, and even

possibly retailers. The benefits of such a system would be shortening de-lays in ordering and order processing, better control of inventory, reduction of

spoilage, and faster recognition of changes in demand at the customer level. Klink was reluctant to quantify these benefits, because they could range

between modest and quite large amounts. This year, for the first time, he presented a cash-flow forecast, however, that reflected an initial outlay of :12

million for the system, followed by :3 million in the next year for ancillary equipment. The inflows reflected deprecia-tion tax shields, tax credits, cost

reductions in warehous-ing, and reduced inventory. He forecasted these benefits to last for only three years. Even so, the project’s IRR was estimated to

be 16.2 percent. This project would be classed in the efficiency category of proposals.

10. Acquisition of a leading schnapps brand and as-sociated facilities. Nigel Humbolt had advocated mak-ing diversifying acquisitions in an effort to

move beyond the company’s mature core business but doing so in a way that exploited the company’s skills in brand man-agement. He had explored six possible

related industries, in the general field of consumer packaged goods, and determined that cordials and liqueurs offered unusual opportunities for real

growth and, at the same time, market protection through branding. He had identified four small producers of well-established brands of liqueurs as

acquisition candidates. Following exploratory talks with each, he had determined that only one company could be purchased in the near future, namely, the

leading private European manufacturer of schnapps, located in Munich.The proposal was expensive: :15 million to buy the company and :25 million to renovate

the company’s facilities completely while simultaneously expanding distri-bution to new geographical markets.2 The expected returns were high: after-tax

cash flows were projected to be :134 million, yielding an IRR of 28.7 percent. This project would be classed in the new-product category of proposals.

Conclusion

Each member of the management committee was ex-pected to come to the meeting prepared to present and defend a proposal for the allocation of Organic’s

capital budget of :80 million. Exhibit 3 summarizes the various projects in terms of their free cash flows and the investment-performance criteria.

2Exhibit 3 shows negative cash flows amounting to only :35 mil-lion. The difference between this amount and the :40 million requested is a positive

operating cash flow of :5 million in year 1 expected from the normal course of busines

EXHIBIT 3 Free Cash Flows and Analysis of Proposed Projects 1 (all values in : millions)

1 2 3 4 5 6 7 8 9 10
Expand Automation
Truck and Eastward Southward Inventory- Strategic
Fleet New Expanded Artificial Conveyer Expansion Expansion Snack Control Acquisition
Project (note 3) Plant Plant Sweetener Systems (note 5) (note 5) Foods System (note 6)

Investment
Property 20.00 25.00 10.00 15.00 14.00 15.00 15.00 30.00
Working Capital 2.00 5.00 20.00 20.00 3.00 10.00
Year EXPECTED FREE CASH FLOWS (note 4)
0
(11.40) (30.00) (10.00) (5.00) (14.00) (20.00) (20.00) (18.00) (12.00) (15.00)
1 (7.90) 2.00 1.25 (5.00) 2.75 3.50 3.00 3.00 5.50 (20.00)
2 3.00 5.00 1.50 (5.00) 2.75 4.00 3.50 4.00 5.50 5.00
3 3.50 5.50 1.75 3.00 2.75 4.50 4.00 4.50 5.00 9.00
4 4.00 6.00 2.00 3.00 2.75 5.00 4.50 5.00 11.00
5 4.50 6.25 2.25 4.00 2.75 5.50 5.00 5.00 13.00
6 5.00 6.50 2.50 4.50 2.75 6.00 5.50 5.00 15.00
7 7.00 6.75 1.50 5.00 2.75 6.50 6.00 5.00 17.00
8 5.00 1.50 5.50 7.00 6.50 5.00 19.00
9 5.25 1.50 6.00 7.50 7.00 5.00 21.00
10 5.50 1.50 6.50 8.00 7.50 5.00 59.00
Undiscounted Sum

7.70 23.75 7.25 22.50 5.25 37.50 32.50 28.50 4.00 134.00
Payback (years) 6 6 6 7 6 5 6 5 3 5
Maximum Payback Accepted 4 5 5 6 4 6 6 6 4 6
IRR 7.8% 11.3% 11.2% 17.3% 8.7% 21.4% 18.8% 20.5% 16.2% 28.7%
Minimum Accepted ROR 8.0% 10.0% 10.0% 12.0% 8.0% 12.0% 12.0% 12.0% 8.0% 12.0%
Spread 0.2% 1.3% 1.2% 5.3% 0.7% 9.4% 6.8% 8.5% 8.2% 16.7%
NPV at Corp. WACC (10.5%) 1.92 0.99 0.28 5.21 0.87 11.99 9.00 8.95 1.16 47.97
NPV at Minimum ROR 0.13 1.87 0.55 3.88 0.32 9.90 7.08 7.31 1.78 41.43
Equivalent Annuity (note 2) 0.02 0.30 0.09 0.69 0.06 1.75 1.25 1.29 0.69 7.33

1 The effluent treatment program is not included in this exhibit.

2 The equivalent annuity of a project is that level annual payment over 10 years that yields a net present value equal to the NPV at the minimum required

rate of return for that project. Annuity corrects for differences in duration among various projects. For instance, project 5 lasts only 7 years and has an

NPV of 0.32 million; a 10-year stream of annual cash flows of 0.05 million, discounted at 8.0 percent (the required rate of return) also yields an NPV of

0.32 million. In ranking projects on the basis of equivalent annuity, bigger annuities create more investor wealth than smaller annuities.

3 This reflects :11 million spent both initially and at the end of year 1.

4 Free cash flow incremental profit or cost savings after taxes depreciation investment in fixed assets and working capital.