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Baldwin Wallace College BUS 545 Corporate Finance

CaseBW COMBO

Baldwin Wooster Corporation (BWC)


Case on Financial Feasibility of a New Product Baldwin WoosterCorporation is a mid-size corporation headquartered in Wooster, Ohio. It manufactures auto parts for domestic and imported automobiles. Their core products have been exhaust systems like mufflers and catalytic converters, and ride control systems like struts and shock absorbers. Recognizing the changing landscape of the auto business via significant globalization and stiff competition from Europe and Asia, Baldwin opened a new division Auto Electronics Division with the purpose of capitalizing on the increased customer demand for electronic gadgets for use in automobiles. The new division is in operation for the past five years and overall it has performed reasonably well. Baldwins Auto Electronics Division (BEAD) has reputable R&D facilities and produced certain products which have been well accepted by critics and consumers alike. They have produced products like car GPS systems, radar detectors, etc. With less than fiveyears experience, Bead is somewhat new to the electronic segment and thus has not been a major player in the market. Baldwins main competition in the area of exhausts and ride control products is Tenneco, a well-run and well managed firm. Its main competition in the electronic products area is Sony, Panasonic, Garmin and Tomtom. Baldwins customers are segmented three ways 1) auto manufacturers like NewGM, Ford, Toyota; 2) auto service specialists like Goodyear, NTB, and Firestone;and, 3) end consumers who buy their products via retail outlets like Sears, Best Buy. Recent trends show a significant growth potential in the GPS market primarily because of technological advances leading to low production costs. Also, increased use of cell phones and the risk associated with driving while on the phone has resulted in law enforcement to place significant emphasis on hands free driving. Many municipalities have passed laws making it illegal to use phones while driving. A Federal Government study commissioned in 2003 (report released in July 2009) indicated the hazards of cell phone use while driving. In 2008, the State of California with the largest number of registered cars in the nation passed a law making it illegal to drive while using a cell phone. Beads strategic management group has looked at the changing environment as an opportunity to create a new product that can appeal to the concerns of the law and yet satisfy consumer thirst for electronic gadgets. Baldwins Electronic Auto Division has patented and developed a new product that has favorable reviews in focus group studies. The product is a combo GPS/Radar Detector/Hands Free Cell Phone unit. The unit performs three functions 1) acts as a GPS device, 2) acts as a radar detector, and 3) acts as a device that converts your regular cell phone to a hands free device. Even though Bead has several specific patents in the field, it is a market laggard in the electronics product line dominated by companies like Sony and Garmin. They are slow in marketing new products even though they have superior technology. In a recent review, the Consumer Reports magazine gave thumbs up by rating the Baldwin GPS unit (GPS only unit) as the Best Value GPS unit in the market when quality is considered in conjunction with pricevalue to the consumer. Naturally, the management is very pleased with the rating given that the competition was the elite group of electronic firms like Sony, Garmin and Tomtom. They would like to capitalize on the current consumer sentiments and other groups by introducing a product that simultaneously appeals to all the concerned groups and thus create value to the consumer. Gomer Pyle is the Chief Operating Officer of Baldwins Bead division. He reports to Sergeant Carter, the divisionpresident. Lucy McGillicutty is the Chief Financial Officer and Archie Bunker is the Senior Marketing Vice President. They both report to PresidentCarter. Carter has requested information relevant to the product and the three executives have put together the following information.

Case Author: Prof Narasimha Mohan, Business Division, Baldwin Wallace College

June2011, Page 1

Product Name BW COMBO a. Sale price of the unit:Most Likely $230.00 each. Optimistic $265 each. Pessimistic $200 each. b. Variable cost: Most Likely 30% of revenue. Optimistic 25% of revenue. Pessimistic 40% of
revenue

c. Fixed Expenses per year: Most Likely $10 million. Optimistic $9 million. Pessimistic $12 million. d. Expected worldwide unit sales for years 1 thru 8:
Most Likely: Optimistic: Pessimistic: 240,000; 270,000, 310,000; 310,000; 230,000; 200,000; 170,000; 130,000. Quantity sold is higher by 12% during first four years only. Quantity sold is lower by 20% for years 1 thru 8.

e. Impact on current BWC products: Erosion of sales of pure GPS units: $1.2 million per year Erosion of sales of pure Radar units: $0.8 million per year

f. New Capital Expenses:


Equip 1: Purchased at time zero: $71 million, depreciated using 5-yr life MACRS method. Equip 2: Purchased on the 1st day of 4th year: $9 million, depreciated using 10-yr life MACRS method. Equip 3: Purchased on the 1st dayof 5th year: $12 million, depreciated using 7-yr life straight line method. Building: The firm is using an existing unused building. No new cost is incurred

g. Net working capital requirements: The net working capital for this project is expected to be 12% of sales and is expected to occur at beginning of the year.

h. Tax rates:
2.3%.

The marginal tax rates are as follows: Federal = 35%, State = 5.2%, Local =

Capital Gains Tax Rate = 18%

Case Author: Prof Narasimha Mohan, Business Division, Baldwin Wallace College

June2011, Page 2

i. Minimum acceptable rate of return (MAAR): BeforetaxRate is 20% j. Project life and terminal Values
The expected life of the project is 8 years. At the end of that life, the salvage value is for the equipment 1, 2, and 3 are expected to be 6%, 12% and 15% of their purchase prices.The building will be used for something else. You have been hired by Vince Carter. You will write a 2to3 page report answering the following questions. Attach all relevant spread sheets (these attachments dont count toward the 1 3 page limits on the write up. Your report should have a summary statement of your recommendation along with a discussion of your findings and the rationale behind your recommendation.

1. What is the NPV?


2. 3. 4. 5. What is the IRR? What is the Discounted Payback? What is Profitability Index? Other relevant indicators? Should Bead undertake the venture? Rationalize with sufficient text, charts,graphsand any other relevant supporting material.

6.

Case Author: Prof Narasimha Mohan, Business Division, Baldwin Wallace College

June2011, Page 3