Assignment: Dynatronics (abridged)
Reading: Higgins, Chapter 7
1. As Ms Kraft, what is your recommendation for the introduction of the new product line?
a. Use the weighted average cost of capital (11.7%) to value the project
b. Assume the net working capital required for a year must be in place at the start of the year. Thus, for the first full year of operations, 1990, the net working capital needed to support that year’s business ($1300, Exhibit #3) must be acquired at 1/1/90.
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c. Assume start-up marketing expenses (footnote c, Exhibit #3) and start-up capital expenditures are incurred at the beginning of 1990.
2. What is the Internal Rate of Return of the new product line and how does it compare to the cost of capital?
3. How does your answer to question #1 change if the net working capital for the year is put in place at the end of the year? Thus, for the first year of operations, 1990, the net working capital ($1300, Exhibit #3) is acquired at 12/31/90. What happens if the company decides the discount rate should be 16%, rather 11.7%?
4. Should R&D expenses (=10.3% of revenues) be allocated to the project? If your answer is “no”, whose P&L statement ultimately absorbs these costs? If your answer is “yes”, would you recommend not doing the project if the R&D allocation caused the Net Present Value of the project to switch from positive to negative?
5. Is the forecast shown in Exhibit #3 consistent with the historical performance of similar products developed by the company with respect to sales, growth, working capital requirements, and the like? Would you recommend for or against the 16% hurdle rate? (See page 3 of the