Project 2: New Plant (Dijon)

Project 2: New Plant (Dijon)

Type 2 Investment: Market Extension

NPV (10.5%)
€0.99 M
Positive Value
IRR
11.3%
Clears 10% Hurdle
Payback
6 Years
Fails 5yr Limit
Recommendation
Conditional
Pending Strategic Prioritization

Abstract

The primary objective is to alleviate critical capacity constraints in the southeastern region, reduce excessive logistics costs, and recapture lost sales. While the project presents a positive NPV and exceeds the IRR hurdle, it fails the strict Payback Period criterion. Despite this, the project is a vital strategic enabler for future Southward expansion.

The Operational Case

The Current Bottleneck

Demand in the southeastern markets exceeds the capacity of our Melun facility. We are currently forcing shipments from Strasbourg to cover the deficit.

  • Margin Erosion

    Prohibitively high shipping costs from Strasbourg are eating into profitability.

  • Lost Revenue

    Inability to support marketing with consistent delivery is causing documented lost sales.

Investment Scope Breakdown

Property, Plant & Equipment €25.0 M

Amortized over 7-10 years

Working Capital Injection €5.0 M
Total Requirement €30.0 M

Financial Analysis

Hurdle Analysis

IRR (Target: >10%) 11.3%
Payback (Target: <5 Yrs) 6 Years
Liquidity Risk: Tying up €30M which is 38% of total budget, for 6 years presents a risk given the firm's 125% debt-to-equity ratio.

Value Creation

NPV (Corp WACC 10.5%) €0.99 M
Equivalent Annuity €0.30 M

Cash Flow & Payback Projection

Estimated projection based on 6-year payback

The chart illustrates the heavy initial outlay and the slow recovery period (red zone), crossing into profitability only in Year 6.

Strategic Matrix

While financials are mixed, the strategic arguments necessitate a view beyond simple spreadsheet analysis.

Operational Synergy

Aligns production geographically with consumption. Failing to build this plant risks permanently ceding market share to competitors who deliver more reliably.

Must-Do Capacity

Expansion Enabler

Project 8 Dependency: If built, Dijon becomes the hub for Italy/Spain expansion. If rejected, Southward expansion is likely doomed to low margins.

Strategic Platform

Defensive Posture

Defends the stock price by securing the "bottom line" against logistical cost inflation. Prevents profit erosion that invites hostile takeovers.

Cost Defense

Risks

  • Capital Lock-up: Long payback concerns bankers.
  • Execution: Construction delays would worsen Melun bottleneck.

Final Verdict: Conditional Approval

Project 2 solves an immediate operational bleeding of cash and opens the door to future growth. However, it consumes a massive portion of the strictly capped budget.

Decision Logic

Scenario A: Sufficient Funds

If high-yield projects (Schnapps Acquisition, Eastward Expansion) are fully funded and €30M remains.

Scenario B: Budget Constraint

If approving Project 2 displaces Project 11 or 7, we recommend deferring Project 2 for one year or seeking alternative financing (e.g., sale-leaseback).