Energy Gel Question
Autor: Mubin Memon • April 14, 2015 • Case Study • 367 Words (2 Pages) • 2,107 Views
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Energy Gel (A)
Suggested study questions
- On the issue of using Energy bar’s excess capacity for producing Energy Gel, do you agree with Mr. Wickler or Mr. Leiter? Why?
- Who do you agree with on the issue of cannibalization of Energy bar sales? Ignore the cannibalization issue in constructing the cashflows
- In Valuing Energy Gel, does Wickler have to consider costs for overhead?
- Compute the relevant cash flows that HPC should consider in deciding whether or not they should produce the Energy Gel product.
- In doing this, your starting point should be Exhibit 5.
- However, if you disagree with some of the data in the Exhibit, you should modify the data (Give your reasons for any changes you make to Exhibit 5)
- Similarly, if there is any missing data in the exhibit, provide this data and justify your reasons (You may use information provided in the case and its footnotes if you think the information in question is relevant)
- COGS is 60% of sales
- Depreciation is straight line. Building and modification and the machinery have economic life of 15 years and 10 years respectively. Assume zero salvage value for both
- Selling expenses is $0.113/unit as given in Exhibit 4
- General and Administrative costs are 12% of the same item for Energy bar in 2001, these costs will grow at 8% per year thereafter
- The tax rate is 35%
- After computing the relevant cash flows using the nominal discount rate of 15%, decide on whether or not the firm should go ahead with this project
- Do you think inflation is reflected in Exhibit 5 (ignore the inflation issue in your computations)? If not, how does this bias the results? Is inflation accounted for in Exhibit 4?
- Do you agree with the two capital budgeting criteria used by the HPC (the payback period and the return on investing capital (ROIC)? If you disagree with the two criteria in question, state your reasons.
- Assume that the salvage value for both the equipment and the building is zero
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