Read the Consultant Notes to see how you have addressed one problem so far.
As a member of the consulting firm, participate in a roundtable discussion to assess how you handled the request for confidentiality from Dr. Dupres.
You might address such issues or questions like these:
What did you do well?
Is there something else you should have or could have done?
Are the conditions you "negotiated" fair to the following people?
Ken and Dr. Dupres
board and shareholders
Are there any other parties that need to be considered in making these considerations?
The main challenge is to "empower" Ken in his role as President and guiding his growth as COO into CEO. Since Ken's appointment to the role of ex-officio corporate officer was done as a "favor" of a major shareholder, it sounds that Ken's status may be undermined because he is in a lower power position.
Dr. Dupres rightly assessed the need for company reorganization. My sense is that there ...
This solution presents a case study of consultation notes: "As a member of the consulting firm, participate in a roundtable discussion to assess how you handled the request for confidentiality from Dr. Dupres."
Considering expanding operation
You are a manger at Percolated Fiber, which is considering expanding its operation in synthetic fiber manufacturing. Your boss comes into your office, drops a consultant's report on your desk, and complains,
We owe these consultants $1 million for this report and I am not sure their analysis makes sense. Before we spend the $25 million on new equipment needed for this project, look it over and give me your opinion. "You open the report and find the following estimates (in thousand of dollars):
1 2 *** 9 10
Sales revenue 30,000 30,000 30,000 30,000
-cost of goods sold 18,000 18,000 18,000 18,000
=gross profit 12,000 12,000 12,000 12,000
-general, sales, and administrative expenses 2,000 2,000 2,000 2,000
-depreciation 2,500 2,500 2,500 2,500
=net operating income 7,500 7,500 7,500 7,500
-income tax 2,625 2,625 2,625 2,625
=net income 4,875 4,875 4,875 4,875
All of the estimates in the report seem correct. You note that the consultants used straingt-line depreciation for the new equipment that will be purchased today (year 0), which is what the
accounting department recommended. The report concludes that because the project will increase earnings by $4.875 million per year for ten years, the project is worth $48.75 million.
You think back to your halcyon days in finance class and realize ther eis more work to be done!
First you note that the consultants have not factored in the fact that the project will require 10 million in working capital upfront (year 0), which will be fully recovered in year 10. Next, you see they have
attributed $2million of selling, general and administrative expenses to the project but you know that $1million of this amount is overhead that will be incurred even if the project is not accepted.
Finally, you know that accounting earnings are not the right thing to focus on.
9. What are the free cash flows in years 2 and 10 that should be used to evaluate the proposed project?
Free cash flow for the following years:
Year 2 =
Year 10 =
10. If the cost of capital for this project is 14%, what is your estimate of the value of the new project?