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Financial Mini Case:




Financial Mini Case;Dave Wang and Eva Welch are facing an important decision. After having discussed different financial scenarios into the wee hours of the morning, the two computer engineers felt it was time to finalize their cash flow projections and move to the next stage ? decide which of two possible projects they should undertake.;Both had a bachelor degree in engineering and had put in several years as maintenance engineers in a large chip manufacturing company. About six months ago, they were able to exercise their first stock options. That was when they decided to quit their safe, steady job and pursue their dreams of starting a venture of their own. In their spare time, almost as a hobby, they had been collaborating on some research into a new chip that could speed up certain specialized tasks by as much as 25%. At this point, the design of the chip was complete. While further experimentation might improve the performance of their design, any delay in entering the market now might mean that one of the established players introduce some similar product of their own. The duo knew that now was the time to act if at all.;They estimated that they would need to spend about $1,000,000 on plant, equipment and supplies. As for future cash flows, they felt that the right strategy at least for the first year would be to sell their auxiliary chips at dirt-cheap prices in order to induce customer acceptance. Then, once the product had established a name for itself, the price could be raised. By the end of the fifth year, their product in its current form was likely to be obsolete. However, the innovative approach that they had devised and patented could be sold to a larger chip manufacturer for a decent sum. Accordingly, the two budding entrepreneurs estimated the operating cash flows for this project (call it Project A) as follows;Year Expected Cash flows ($);1 50,000;2 200,000;3 600,000;4 1,000,000;5 1,500,000;An alternative to pursuing this project would be to sell their innovative chip design to one of the established chip makers. This way, they would receive an upfront payment. But the amount would be relatively small ? perhaps around $200,000 - as neither their product nor their innovative approach had a track record.;They could then invest in some plant and equipment that would test silicon wafers for zircon content before the wafers were used to make chips. Too much zircon would affect the long-term performance of the chips. The task of checking the level of zircon was currently being performed by chip makers themselves. However, many of them, especially the smaller ones, did not have the capacity to permit 100% checking. Most tested only a sample of the wafers they received.;Dave and Eva were confident that they could persuade at least some of the chip makers to outsource this function to them. By exclusively specializing in this task, their little company would be able to slash costs by more than half, and thus allow the chip manufacturers to go in for 100% quality check for roughly the same cost as what they were incurring for a partial quality check today. The life of this project also is expected to be only about five years.;The initial investment for this project is estimated at $ 1,200,000. (This is without taking into account the any cash flows from the sale of their patent). As for the future, Eva and Dave were pretty sure that there would be sizable profits in the first year. But thereafter, the zircon content problem would slowly start to disappear with advancing technology in the wafer industry. Keeping this in mind, they estimate the future cash inflows for this project (call it Project B) as follows;Year Expected Cash flows ($);1 700,000;2 700,000;3 400,000;4 300,000;5 100,000;Eva and Dave now need to make their decision. For purposes of analysis, they plan to use a required rate of return of 20% for both projects.;FIN 390 Assignment;Capital Budgeting Mini Case;Student Name:_________________________ Date;Assignment Questions;Part I: Qualitative Section;Project A;1. Payback period;2. Discounted payback period;3. NPV;4. IRR;5. Profitability Index;Project B;1. Payback period;2. Discounted payback period;3. NPV;4. IRR;5. Profitability Index;FIN 390 Assignment;Capital Budgeting Mini Case;Student Name:_________________________ Date;Part II: Qualitative Section;Additional Information: Assume Dave Wang and Eva Welch by exercising their stock options and usage of some of their savings, that they have sufficient funds to fund 1/3 of the Investment. But they will need to raise the rest of the capital from Investors or Venture Capital type bankers. So this section is to evaluate how one should think thru this financial problem and the logic how to approach logic others for funding. The questions are to evaluate you processes and overall logic to solve this above case.;1. Define problem: Briefly, describe the problem being faced by our two budding entrepreneurs. In other words, what are the decisions (or decision) that they will need to make?;2. Identify strategies: State the different approaches you think could be used to solve this problem. In other words, what are the criteria or metrics that you would use to help make the project(s) decision? Why did you specifically pick a particular one or ones.;3. Propose Solutions/Hypotheses: Do you propose a preferred project or approach? If so why. Additionally discuss the pros and cons for each project.;4. Evaluate possible outcomes: Briefly state the limitations of the approach you chose, and outline what further analysis you would recommend. And can you identify what additional data you would want to solicit or develop before going to the investors?;5. Proposed what the gist of your ?pitch? to investors would be, that is it?s basic elements. Why should they invest? (Note: if desired you can explicitly add some additional case assumptions you think are needed to support your rational for investment.);Additional Requirements;Level of Detail: Show all work


Paper#21749 | Written in 18-Jul-2015

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