simulation page

Product Overview

In January 1993, the senior management committee of this company has to decide which major projects the company should fund for immediate implementation. The board of directors arbitrarily set a limit of European currency units (ECU) at 80 million to spend on capital projects in 1993. But various managers have proposed projects totaling ECU208 million. Students must evaluate the completed discounted cash flow (DCF) analyses presented along with qualitative factors (mainly the strategic considerations and the internal politics of the company) and choose the projects to be approved.

Learning Objectives

The main objectives of the 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], and 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 or replacement chains or both); 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.