Introduction Roget SA (Roget) is one of the largest industrial companies in Belgium, which encompasses three smaller firms that produce industrial chemicals. Mr. Anders Ekstrom, Managing Director of Roget’s Swedish subsidiary AB Thorsten, has proposed to build a plant in Sweden for the purpose of manufacturing a chemical adhesive used in drying paper (XL-4). Although there was a unanimous vote among the board to construct the plant, another look has raised issues concerning the feasibility of the proposal. On top of the possibility of the denial of the proposal, there are concerns with the company that hinder the profitability and growth of the organization. First, a decision needs to be made regarding the funding for either the Swedish or Belgian proposal for the production of XL-4. There are various factors that need to be considered in the decision making process, one of which is the return on investment, as well as the possible transfer price between the divisions. Secondly, the company lacks the ability to clearly establish whether they are a centralized or decentralized organization.
Issue 1: Accepting either the Swedish or Belgian Proposal After reviewing the Swedish proposal once again, Mr. Michael Gillot, Roget’s Senior Vice President, has decided to put the proposal on hold to ensure the numbers used to generate the cash flows are accurate. With both Sweden and Belgium offering individual proposals, a thorough analysis is done to determine which proposal is ideal for the organization. After calculating the net present value (NPV) and internal rate of return (IRR) for both proposals, it seems Sweden has a higher NPV, whereas Belgium has a higher IRR (Appendix 1). However, the difference between the two NPV’s (approximately Skr. 13,000) is relatively small compared to the difference between the two IRR’s (approximately 39%).