Ferro Industries: Two Projects, One Budget

Finance

medium40 min0 submissions

BCG

Scenario

Ferro Industries, a industrial components company in Europe, has two capital projects competing for approval and only €133 M of approved capital this year.

Project A — Automation upgrade. Requires €63 M upfront and is expected to generate €28 M of incremental after-tax cash flow per year for 7 years.

Project B — New production line. Requires €159 M upfront and is expected to generate €87 M per year for 6 years.

The company's hurdle rate is 15%.

Two complications. First, the finance team has already spent €20 M on engineering studies for Project B, and the COO argues this money "shouldn't be wasted". Second, Project B's cash flows depend on a customer contract that is signed but renews annually.

Supporting data

project a

life years: 7
investment m: 63
annual cash flow m: 28

project b

life years: 6
investment m

159

annual cash flow m

constraints

hurdle rate pct: 15
capital budget m: 133
already spent on b studies m: 20

Your task

Recommend how to allocate the capital budget. Provide:

Analysis — NPV, IRR and payback for each project.
Risks — including how you treat the engineering spend and the contract renewal risk.
Recommendation — which project (or projects) to fund.

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How you'll be graded

100 points, 60% to pass.

assumptions20
recommendation30
risk assessment20
financial analysis30

Hint

Reveal suggested structure

NPV of each project using the annuity form: NPV = CF × [(1 − (1+r)^−n) ÷ r] − I₀
IRR — the rate at which NPV = 0. Note that IRR alone misranks projects of different scale.
Payback as a liquidity check, not a decision rule.
Sunk cost — the €20 M is spent and irrecoverable. It must not enter the decision.
Profitability index (NPV ÷ investment) when capital is rationed.
Risk-adjust Project B for the annual renewal.