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Bernoulli Division

This case study based on the concept of mutually exclusive projects evaluation - such as project comparisons, chain of replacement, asset replacement/ retirement decision or incremental cash flows.

The following formula might be applied to the questions:
CFAT = Cash flow after tax
CFBT = Cash flow before tax
Teff = Effective company tax rate
T = company tax rate
U= proportion of tax collected from company that is utilized, ie paid out to shareholders and recovered through tax credited associated with franked dividends
Sn = Salvage value
SnAT = Salvage value after tax
WDV = Written down value

Teff = T(1-U)
Tax savings on depreciation = Depreciation * Teff

CFAT = CFBT*(1- Teff ) + Depreciation * Teff
WDV = Cost - accumulated depreciation
SnAT = Sn - Teff(Sn - WDV)


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Jennifer Sobey, an analyst in the headquarters of Working Computers, has been asked to evaluate whether or not Working should sell a division of the firm which has been losing market share and requires a great deal of new investment to remain competitive. The ailing product is a personal data appliance, or PDA, that once led the market in features and innovation, only to fall prey to competition from numerous firms once it had paved the way for the product category.
Complicating Jennifer's analysis and recommendation are several political issues involving the wayward division. In particular, Working's recently returned CEO, Stewart Workman, has decided that the product (the Bernoulli device) is a "loser" and has plans to use the capital currently committed to Bernoulli to boost the ailing performance of other parts of the firm.


In the jobs she worked throughout high school and University, Jennifer Sobey had never
encountered a corporate culture as intense and pervasive as the culture at Working Computers.

The corporate motto, displayed on banners, T-shirts and coffee cups throughout the headquarters complex, was "Everyone here really believes in Working." On her long commute home, often after twelve hour days in the office, she imagined that monks of the Dark Ages had faced a similar environment. Even though she was just a beginner, she could see than becoming part of the company was going to be as challenging to her social and political skills as it was to her technical background.

Working Computers had a long history of internal struggle, and it had a loyal user base that had to be kept happy as well. Jennifer had been hired as a marketing analyst, in accordance with the jobs she had worked during school. After several months, however, it was clear to her superiors that she was far more valuable as someone who could see the future and attach numbers to it. They had decided to promote her to the position of "Cost Engineer," which seemed to have a nice ring to it, and gave her a bigger cubical and more responsibility. Thankfully the new "office" was also closer to the communal coffee machine. The new position was also more in line with her education; she had studied manufacturing technology, finance and industrial engineering in University, and she was putting much of that background to use every day.

Jennifer was struggling with the decision to divest (or perhaps eliminate) a currently profitable product line. Her immediate superior, Tom LaPonte, was the controller and chief financial officer for Working Computers, and had entrusted Jennifer with a super-secret question: could Working do without the Bernoulli division? To be sure, the ultimate decision would be made by LaPonte and the other executives of the firm, including the quixotic and visionary founder and CEO Stewart Workman. Her task centred on developing the numbers necessary to portray all relevant aspects of the decision. In addition, she had a feeling that this project was one of special interest to the CEO.

Working Computers had been in business for almost thirty years, and it built and distributed a unique line of desktop computers, laptop computers and an operating system which was preferred by media professionals around the world. In addition to traditional computers, Working had been one of the first companies to market what had come to be known as a "PDA" or personal data appliance. The research and development expenditure for that product line had come at a time when the company was facing stiff competition in the laptop and desktop markets, and millions of dollars had been spent creating a completely new and innovative interface for the Working PDA -the Bernoulli device. Working's top management, at the time, had felt certain that personal computers were moving in the direction of smaller, more specialised computers which would perform a few tasks more conveniently than a traditional laptop.


The Bernoulli device was a small, handheld device the size of a stenographer's pad with integrated applications for recording appointments, addresses and contact information, as well as freeform text notes. It had been designed to replace the traditional executive calendar binders that Jennifer and so many of her colleagues had carried in school, but it had evolved into much more than that. The Bernoulli had been popular due to the ability of users to write new software for the machines. Users had quickly learned that their investment in the Bernoulli gave them the option to program the machines for almost any task, from electronic reference books to data acquisition from industrial machines. Best of all, the Bernoulli would easily interface with a host computer for uploading and printing. The more recent incarnations of the device had been built for accessing Internet news services and email servers from the field without the need for a full-size laptop or host computer. For reliability, the Bernoulli had no moving parts.

With success, after a rocky start, came competition. Several different firms had developed PDAs which improved on aspects of the Bernoulli, even though the research and development folks at Working had tried to keep the device current. Most importantly, competitors sold machines which could be connected to a variety of different computing platforms; the Bernoulli device would only upload and download from a Working-brand computer. In addition, even with Working's head start, competitors had used manufacturers outside of the U.S. to ...

Solution Summary

This solution is comprised of a detailed explanation and calculation to evaluate the projects for Bernoulli division.