The risk-free rate used was the long-term Treasury bond rate of 9. 5% while the debt rate premium was calculated by subtracting the long-term Treasury bond rate from the long-term “AA” corporate bond rate. With Dixon’s ability to cover interest expense and relatively low target debt ratio, we applied “AA” rating to Dixon, which yielded the debt premium of 0. 75%. incremental cash Flows Associated with Acquisition – Without Laminate Technology We developed pro forma financial statements with projected incremental cash flows associated with this acquisition (Exhibit II).
Incremental Cash Flows Associated with Acquisition with Laminate Technology Investment If implemented, the December 1980 application of laminate at the Collinsville plant will provide for significant savings. The laminate has a projected installation cost of $2. 25 million, which will be more than recouped over the life of the improvement. American’s scientists forecast the laminate to reduce power needs by 15% to 20%. We have forecast power expenses to start at over $6. 3 million in 1980 and rise steadily to a stabilized level of near $12 million by 1984.
A 15% power reduction will lead to savings of $1. 16 million in 1981 and annual savings of $1. 77 million from 1984 – 1989. A 20% power reduction will lead to savings of $1. 55 million in 1981 and annual savings of $2. 36 million from 1984 – 1989. In the calculation of incremental cash flow from these improvements, we also must factor in the initial outlay of $2. 25 million and the effects of depreciation. Since the improvement is depreciated over ten years, we have an annual increase to cash flow of $225,000, which is the annual depreciation expense.
The Dissertation on Related Literature to the Cash Flow Management
The role of cash flow information in discriminating between bankrupt and non-bankrupt companies remains a contentious issue. In a number of literature reviews on bankruptcy prediction (e. g. Zavgren, 1983; Jones, 1987; Neill et al. 1991; Watson, 1996) the common view is that cash flow information does not contain significant incremental information content over accrual information in ...
We have started effects on cash flow besides initial outlay in 1981 due to the installation taking place at the very end of 1980. No effects from the improvements will be realized in 1980. Overall, the installation of this laminate is a great project. Power savings will lead to an IRR of 16. 37% for the 15% power reduction case and 18. 14% for the 20% power reduction case. The NPV of the project became positive $ 97,000 for the 15% power reduction case and $ 1. 23 million for the 20% power reduction case when discounting at the WACC (Exhibit III).
Attractiveness of Collinsville Proposal on economic grounds
From an economic standpoint, the Collinsville proposal is not attractive due to a negative NPV. This acquisition will devalue of the firm by $ 1. 8 million and will provide a 12. 86% IRR which is below WACC for Collinsville plant. Namely, expected return of the project will not satisfy estimated risk. Thus, Dixon should not invent in the plant and is recommended to research other alternative projects if possible. In more competitive market, easier entrants can push any economic revenue down to “zero. ” The sole reason why the firm decides to enter the competitive market is to take alive economic revenue.
For this Collinsville plant, there is no economic driver for Dixon to enter the market with the acquisition. Attractiveness of Collinsville Proposal on Strategic grounds From a strategic standpoint, Collinsville appears to be a good investment for Dixon even though there is no beneficial motivation on economic ground. From the fact that Dixon Corporation had produced a number of chemicals for sales primarily to the paper and pulp industry, it can be said that it is a value-added business with the experience rather than venturous business.
The Term Paper on Economic Indicators used to project economic policy
When one speaks of the economy they should speak of it as if it were an animate object. An economy may healthy, productive or efficient. Likewise, an economy may be weak, slow or inefficient. The question is how do we know how to classify our economy? GNP -GROSS NATIONAL PRODUCT. Economists have devised numerous statistics designed to ascertain the overall health of our economy. Historically, the ...
As such, the acquisition of the Collinsville plant would fit well with Dixon’s strategy, incorporating a new product in its business, thereby giving it a more comprehensive range of products and a new source of revenue. In addition, since Dixon and Collinsville share a number of major customers, economies of scale can be applied, allowing the corporation to save on selling costs by marketing sodium chlorate through Dixon’s existing sales group. Besides the potential synergies obtained from acquiring Collinsville, Dixon should consider the opportunity costs incurred if they do not purchase the plant.
For one, if Dixon does not acquire the plant it is a reasonable assumption that one of their competitors will. Another consideration is the market share Dixon may gain from expanding its product line. Decision and Recommendations We believe that Dixon should not approve the acquisition of the Collinsville plant. This acquisition has a negative NPV and will devalue $1. 8 million of value to the firm. Even though there is benefit on strategic grounds, it is still hard to say firmly “But it. ” We made some requirement to approve the acquisition. Only condition is that Dixon guarantees benefits on both strategic and economic grounds.
We analyzed that there is strategic benefit to acquire the plant. In other hands, we were unable to find economic driver for Dixon. As we projected “Incremental Cash Flows Associated with Acquisition with Laminate Technology Investment”, we know a way that can overturn a negative NPV to a positive NPV. That is R&D. Investment in new technology would be only way for Dixon to survive this competitive market and be leading company. There should be cash outflow for R&D expenditure, but it would bring competitive advantage of cost-saving which results in considerable increasing of IRR and NPV.
From the fact that R&D is the most important factor on this project decision, we recommend the Dixon to invest/ acquire plant that is long-lived. And with less attractive appreciation schedule with longer term, purchase price would be amicably negotiable. We would recommend that Dixon would choose to invest in another project even it had never experienced. It should also satisfy benefits on both strategic and economic ground. Within the scope, if Dixon finds an alternative project meeting both benefits and has favorable funding required, it will be more valuable project than Collinsville plant.
The Business plan on Project planning and evaluation
Before anyone is going to do something, there is nothing as sensible as planning. A plan as we know is something thought about and chalked out in advance before the real action takes place and is actually a recipe for success. But then, the word ‘plan’ does not need much of a definition. It has been used so much that it has become quite hackneyed. So, we all know what it means, but how ...
The dilemma for Dixon to make a decision on any potential project is the degree of importance on strategic and economic grounds. We understand that both are critical criteria for project judgment. But we insisted that importance on strategic ground is superior to that on economic ground. Simply, economic ground depends on whether NPV is greater than zero or not. It is like “True/False” question. Once, Dixon sees there is economic benefit, the strategic driver dominates. This strategic approach is long-term driven business implementation.
