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    Decision process for eliminating a product at Working Computers Inc.

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    1. Given the unit sales information in Exhibit 1, develop an annual revenue forecast for 2004 through 2009. Forecast sales first assuming that the revised Bernoulli will be introduced one year from today, and then create a forecast which is based on sales of the current model, assuming that Working declines to invest more capital in Bernoulli.

    2. Use the cost information Jennifer has assembled to construct a forecast of cost of goods sold and operating expenses for 2004 through 2009. Assume first that the Bernoulli will be introduced, with its new cost structure, one year from now, and then calculate a cost forecast assuming that the $18 million is not provided for development of the new product.

    3. Using the information developed for Questions 1 and 2, develop a discounted cash flow analysis for the Bernoulli division for 2004 through 2009. Working's board has asked for net present value, profitability and the internal rate of return when making decisions in the past. Complete your analysis assuming that the additional investment is contributed today. Be sure to recognise a terminal value for the division at the end of 2009.

    4. Make a recommendation as to whether or not Working Computers should contribute the requested $18 million to the Bernoulli. Be sure to recognise/discuss all aspects of the decision, including the potential impact that the requested ongoing investment dollars could have on the plans of Stewart Workman.

    5. Jennifer expects Stewart Workman to ask about selling the Bernoulli division. What price should Working ask for if it sells Bernoulli today, immediately after making the requested investment? What price could it expect to receive if it plans to leave Bernoulli alone?

    6. In addition to the issues in Question 1 through 5, what other considerations might be appropriate when a firm is considering eliminating a product line or divesting a division?

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    Solution Preview

    Basic concepts

    The investment decisions of a firm are generally known as the capital budgeting, or capital expenditure decisions. The firm's investment decisions would generally include expansion, acquisition, modernization and replacement of the long-term assets. Sale of a division or business (divestment) is also as an investment decision.
    Decisions like the change in the methods of sales distribution, or an advertisement campaign or research and development programs have long-term implications for the firm's expenditures and benefits, and therefore, they should also be evaluated as investment decisions. Several different procedures are available to analyze potential business investments. Some concepts are better than others when it comes to reliability but all provide enough information to get the general scope of the investment.

    The five procedures that provide useful information are the Net present Value (NPV), the Payback Rule, the Discounted Payback, the Internal Rate of Return (IRR), and the PI). These procedures will help rank the projects from the greatest investment to the worst.

    Thus capital budgeting has following characteristics:

    The exchange of current funds for future benefits.
    The funds are invested in long-term assets.
    The future benefits will occur to the firm over a series of years.

    Criteria of selection of Capital Budgeting project:

    It should maximize the shareholders' wealth.
    It should consider all cash flows to determine the true profitability of the project.
    It should provide for an objective and unambiguous way of separating good projects from bad projects.
    It should help ranking of projects according to their true ...

    Solution Summary

    The solution shows a step by step solution for a decision making process at Working Computers Inc. The analysis starts with a forecast of revenue and sales as well as an estimation o the cost of goods. Using these as well as discounted cash flow analysis and other methods, the solution proposes a number of considerations for the firm to consider when deciding on discontinuing a product line.