IB Business Management SL 3.8 Investment Appraisal Question Bank

Grunsburg Textiles (GT)


Grunsburg Textiles (GT) is a textile company founded by the paternalistic leader Henrik Steiner. As the company grew, it became very committed to corporate social responsibility (CSR). "Our aims," GT says on its website, "include making profits, providing safe and secure employment, contributing to society through investment in environmentally friendly production practices and supporting ethical causes". Many people believe that GTs success is tied to its reputation for taking care of its employees and for its commitment to CSR.
In 2015, GT purchased €44 million in new environmentally friendly equipment. It financed the purchase with a bank loan. GT originally forecasted that the new equipment would generate €8 million in annual net cash flow. Instead, the actual increase in GTs annual net cash flow from the new equipment was only € 6 million. The Chief Financial Officer (CFO), Elaine, warned Henrik that unless net cash flow increased significantly, the average rate of return (ARR) would be significantly lower than originally forecasted.
G T is struggling to make the loan payments and to have sufficient working capital. Elaine determined that one way to shorten the working capital cycle is debt factoring. However, when she approached several (debt) factors, she was discouraged by their proposed discount rates.
Elaine knows that the situation is worse than she had warned. If the economy were to weaken and revenue to decline, she believes that the company could go out of business. Proposals for a solution include cutting back on GTs commitment to its employees and CSR practices.