Does the project appear economically viable

Reference no: EM133689733

Case #1: The Procter & Gamble Company: Investment in Crest Whitestrips Advanced Seal

Note that to complete this assignment, each group (3 students) must write-up a report that contains both executive summary and detailed analysis. All students must prepare for class discussion.

Executive summary should contains all info for executive to understand the issue and help them make proper decision. The summary should not be longer than one page.

The rest of the report should be between 3-10 pages. The length of the report is not our focus as long as you provide all answers adequately and write the report well. The report should be understandable by people who do not know much about finance concepts.

Change the unit price of Basic product to $13.6 per unit. If you use $13 in your report, it will be automatic 1 point penalty out of 10 points maximum score.

Write a report to answer the following questions.

Question 1: Does the project appear economically viable? Which strategic proposal do you find most appealing? Build a four-year DCF model to support your recommendation

Question 2: What are the key value drivers of the Advanced Seal Investment? Conduct sensitivity analysis to identify which factors affect NPV of the projects the most.

Question 3: What recommendation would you make to Roman for P&G's investment in Advanced Seal? Note that you can also create a new recommendation. You don't have to follow the ones shown in the case. You should be creative.

Clarification
Let's assume that $1.5 million in one-time development expenses will not be capitalized. Treat this as expenses at time 0.
For depreciation, the case recommends five-year accelerated schedule for tax purpose.
Because we are focusing on cash flow which is directly linked to tax, we therefore should use five-year accelerated schedule to compute FCF.

20% in year 1
32% in year 2
19.2% in year 3
11.52% in year 4
11.52% in year 5
5.76% in year 6
The depreciation schedule above follows half-year convention

Using the half-year convention, a taxpayer claims a half of a year's depreciation for the first taxable year, regardless of when the property was actually put into service. It is assumed that the property being depreciated was placed into service at the midpoint of the year. To compensate for this computation, the taxpayer is entitled to another half-year of depreciation at the end of the normal recovery period
Here is an example of how to handle a situation in which you use the machine for 2 years but the depreciation schedule is 3 years.
Capital Expenditure at time 0 = 90
Depreciation = 30 per year for 3 years
However, you use machine only for 2 years and its market value at the end of year 2 = 0
At the end of year 2, Book value = 30, you can write off this book value and create accounting loss which will have tax benefit because it will help us reduce tax of the firm by 30 * Tax rate. If tax rate = 20% then this write off will create positive cash flow effect 30*20% = 6 at the end of year 2. The machine will not show up on balance sheet after writing it off.

Cannibalization
From the case "... cannibalization of existing Crest Whitestrips products would be high, on the order of 50% to 60% for Premium units and 15% for Basic units. Such cannibalization rates meant that 65% to 75% of Advanced Seal's 2 million expected units was coming straight out of existing P&G sales".

Notice that the statements above focus on "units". This means that if P&G sells 100 units of Advanced Seal, P&G will sell Premium 50 to 60 units fewer and sell Basic 15 units fewer.

Reference no: EM133689733

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