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Financial Analysis

In: Business and Management

Submitted By Celestemomomo
Words 2177
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FIN 2230
Financial Management
(Section 3)

Assignment

Yeung Pou Ian, Fanny 09011056 Zeng Yunru, celeste 11050039 LIAO Yi ,Hunter 11050020 Chen Qiqi, Yuki 10050248 Lam Ka Po, Juliana 11002530

HUNG Yik Sze ,Cecilia 11001623

Chen Guangqi, Nikolais 11000945 Wang Lishi, liz 11502614

Executive Summary

RECOMMENDATION:
Take the chance, lead the market! Adopt the new technology and enter Japanese market!
As the saying goes "Never be afraid to try something new ". After adopting the new strategies, Net Present Value for the whole project will soar to 6,114,217, which is almost three times the NPV of the former project. Besides, tapping into the booming Japanese market and take 2% market share, company will receive not only significant capital gain but many other intangible benefits.

Why using new technology is a winning strategy?
1. Statistically, new technology brings along a higher return. Once adopt the new technology, NPV will increase significantly from$2,233,511 to $4,895,728 , IRR of the new project will also be 16% higher.
2. This is a chance to clean up the competitors ahead and gain the first-mover advantage. The adoption of the new technology will prevent a possible drop in sales if counterparts implement similar technology. Furthermore, company can obtain the competitive advantage by selling the patent of this technology to make profit.
3. Many intangible benefits will be generated. reputation is the life of the company. New technology adoption reduces pollution, implements CSR and helps better promote corporate image and increases brand recognition.
Why entering Japanese market is a must?
1. Booming Japanese market ensures higher return. With approve of OEM in Japan, company can penetrate into this big and fast expanding market, as well as enlarge the market share in US and Europe. The NPV will reach to $6,114,217, which is 25%higher than the one without Japan.
2. A choice to diversify the risks: new market reduces the individual downside risk as a whole.
3. A chance to learn from Japanese competitors. Embraced by Japanese culture, the company will be able to learn from its competitors.

Progress always involves risks
1. Financial burden will be increased. New technology requires higher initial investment, but the return of investment on R&D is hard to predict and evaluate. Furthermore, cash flow will be low or negative in the first two years in Japanese Market, thus brings higher risk.
2. Difficult to penetrate into Japanese market due to their brand loyalty.
3. Low selling price compounded with depreciation of Japanese Yen decrease the profits.
4. However, even with the potential risk , the project is still promising! The worst case of lowest market share in Japan is still better than the best case with the use of old technology.

Background Analysis

Declining estimated sales in U.S. and U.K. markets
| |Year 0 |Year 1 |Year 2 |Year 3&4 |Year 5 |
|Sales (unit) in U.S. | |950,000 |2,000,000 |1,000,000 |800,000 |
|Sales (unit) in U.K. | |500,000 |1,000,000 |700,000 |400,000 |
|Inventory, $ |90,000 |170,000 |250,000 |60,000 |0 |
|Account payables, $ |40,000 |100,000 |100,000 |25,000 |0 |
|Account receivables, $ |0 |50,000 |50,000 |10,000 |0 |

As mentioned in the case, the new product is planned to be sold in U.S. and U.K. Based on the above estimated sales figures, it is expected that the sales of the new product will start dropping in Year 2 in both the U.S. and U.K. markets. This shows that by only investing and selling the new product in these two markets, the company may not be able to earn a promising return unless selling the new product in a new market as well. In view of the current situation, the old technology containing toxic materials which is being used in the existing products has the probability of being banned in U.S. in the near future. Regardless of the benefits and costs of using the new technology, there is call of better not to continue using the old technology because of this. The company will give a chance to enter the Japanese market if it decides to adopt the new technology.

Market Size Estimated of the Japanese Market
| |Year 0 |Year 1 |Year 2 |Year 3 |Year 4 |Year 5 |
|Market size |15,000,000 |17,250,000 |19,837,500 |22,813,125 |26,235,093 |30,170,357 |
|Expected market size captured |300,000 |345,000 |396,750 |456,262 |524,740 |603,407 |
|(2% of total market) | | | | | | |

The Japanese market has a current size of 15 million units and is expected to grow at a rate of 15% per year for 6 years. Also, it is expected that the company can capture 2% of the total Japanese market. The above table with the market size calculation shows that the Japanese market is an expanding market at least in the coming 6 years. A growing estimated sales is expected. This means that the company will be benefited if entering the Japanese market even it can only capture 2% of the total Japanese market as there may be a possibility of growth in sales with the rapidly growing market captured in the near future. The inflation rate of Japan is expected to be zero so entering the Japanese market will not be at a high risk.

Using NEW or EXSISTING technology?

Decision 1: Adopt New technology!
Benefits:
1. Significant increase in NPV with little more initial investment
| |Old tech, |Old tech, |New tech, |New tech, |
| |no competitor |with competitors |no enter Japan |enter Japan |
|NPV |US$3,000,154 |US$2,233,511 |US$4,895,728 |US$6,114,217 |
|IRR |62% |50% |66% |57% |

We can see from the chart that when adopting new technology, no matter the company enters the Japan or not, the NPV increases significantly. The IRR is relatively higher. Although when entering Japan market with new technology the IRR is slightly lower than the best case(no competitor) of using old technology, both cases are much better than the worst case of using old technology with competitors.

2. Increase margin of the product
Sale price in US in Year 1
| |Old technology |New technology |
|Sale price |US$2.000 |US$2.600 |
|Unit cost |US$1.000 |US$0.625 |
|Margin |0.500 |0.760 |

After adopting the new technology, the margin of the product increases significantly due to the increase in sales price as well as the reduction in cost. This increases the company’s ability to reduce the product’s price so that it gains competitive edge over other competitors. Even though the drop in sales due to long capacity and big initial investment will chunk up most of the extra profit, it is highly recommended to take new technology. Because those initial investment for new equipment and research are considered as investment but not as expense. The depreciation of assets will provide tax shield and the investment in R&D will provide the company new technology. This technology cannot be bought and will benefit the company for a long period of time. The company can even sell the patent of this technology to make profit.

3. Potential development in expanding Japan market With the new technology, the company can open a new expanding market with a 15% growth for six years. Even though the return of the first two years might be negative, but in the long run, this market is very attractive.

4. Better quality of product helps promote name recognition The life of the product is expected to be 40% higher than its competitors’. This will leave consumers an impression of good quality and high technology. International news will be attracted to broadcast it, which for sure will promote the product and company’s name recognition.

5. First-mover advantage The adoption of new technology will prevent competitors from implementing similar technology. Now all the other competitors are using old technology, which will sooner or later be obsolete. Quick actions in developing new technology will help the company become the market leader in the future and enjoy certain kind of monopoly. Adopting new technology will also help prevent the possible drop in sales when counterparts come up with new products.

6. Implementing Corporate Social Responsibility by reducing pollution Using new technology will make the company’s operation more environmental friendly. This shows the company’s concern of corporate social responsibility, which in turn will promote the company’s corporate image. This improvement of public image will finally be revealed in sales figures.

Risks:
1. A slightly bigger initial investment
| |Old tech, |Old tech, |New tech, |New tech, |
| |no competitor |with competitors |no enter Japan |enter Japan |
|Initial investment |US$1,550,000 |US$1,550,000 |US$2,060,000 |US$2,860,000 |
|Percentage in NPV |51.66% |69.40% |42.08% |46.78% |

The absolute number of initial investment is slightly bigger, but the increase investment will bring along more profit (decreased percentage of initial investment in NPV). However, if the company is in short of cash, the higher cash out flow will put more financial burden to the company, and thus create more risks.

2. Higher risk of high-tech project The return of investment on R&D is hard to predict and evaluate. Sometimes we put money into research but cannot get the expected outcome on time. What’s more, since the development of science and technology is so fast, the newly developed technology will soon be obsolete. We cannot ensure how long we can enjoy the competitive edge generated by the new technology.

ENTERING or NOT ENTERING the Japanese Market?

Decision 2: Enter Japan market!
Benefits:
1. Higher NPV
| |New tech, no enter Japan |New tech, enter Japan |
|NPV |US$4,895,728 |US$6,114,217 |
|IRR |66% |57% |

If the company enters Japan, it will enjoy a much higher NPV. The IRR is a little bit lower because when entering Japan, in the first two years, the company charges lower prices for entering the market and the good effect on sales is revealed only after the company gets approved by OEM. So the majority of the cash flow is ploughed back later. Given a relatively higher WACC, the IRR is lower.

2. Approval of OEM in Japan helps capture larger market shares and bring extra benefits The approval of OEM will help the company capture larger market share in US and Europe. It also improves corporate image and saves promotion costs. The new technology will also attract high-tech oriented customers and bring additional profits from other product lines.

3. Diversification of risks With the new technology, Japan becomes a new source to sell our battery. This reduces the individual downside risk in U.S. and U.K as a whole.

4. Opportunity to learn from Japanese competitors in many aspects.

Risks:
1. Country risks: Political, Capital, Rules & Laws Political: the political situation is not stable, especially during financial crisis. Relation between countries might change. Trade barriers might also be adopted in times of strained relations. Capital: the flow of capital might be restricted. The exchange rate may fluctuate beyond expectation. Rules & Laws: specific rules & regulations might not be well understood before entering the Japan market. This might incur extra cost in entering the market.

2. Difficulties of penetrating into Japanese market The Japanese people are loyal to home-made products even when OEM approves the product. So it would be hard and costly to persuade consumers turn to our product.

3. Low or negative cash flow in the first two years Due to the low penetrating price as well as the process of OEM qualification, the cash flow in the first two years is low or even negative. This adds the financial strains to the company.

4. Low price in Japan
| |Year 1 |Year 2 |Year 3 |Year 4 |Year 5 |
|Selling Price in US |US$2.60 |US$2.70 |US$2.81 |US$2.92 |US$3.04 |
|Selling Price in UK |US$2.09 |US$2.20 |US$2.33 |US$2.45 |US$2.59 |
|Selling Price in Japan|US$1.03 |US$1.43 |US$1.48 |US$1.53 |US$1.58 |

Even though entering the Japan market will significantly increase the profitability of US and UK market. But the margin in the Japan market is rather small. With slightly change either in cost or in price, the company may end up having no profit at all.

5. Depreciation of Japanese Yen
| |US |UK |Japan |
|Inflation |4.00% |5.00% |0.00% |
|Nominal int. rate |5.50% |5.00% |2.00% |
|Real int. rate |1.50% |0.00% |2.00% |

Even though the nominal interest rate is higher in US, but considering the inflation, the real interest rate in Japan is higher. Thus, the Japanese Yen’s purchasing power is ever decreasing even when its nominal exchange rate is appreciating. So the speed of price increase in Japan is lower than other markets.…...

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