Jacobs Division
1. Should the Silicone-X project be undertaken? Why/why not?
After completing the analysis and reviewing the NPVs and IRRs for each option, labor intensive and capital intensive, Soderberg should recommend that the Jacobs division move forward with production of Silicon-X using the labor-intensive option. The NPV and IRR methods make the same decisions if used for independent projects however, since these projects are mutually exclusive, the best NPV option should be used. In this case the NPV for the labor-intensive option is positive at twelve percent, sixteen percent and twenty percent while the capital option is only positive at twelve percent and sixteen percent. The labor-intensive option meets the expectations for both the company guidelines and Mr. Reynolds’ personal guidance for the Jacobs Division. The company guidelines state that a return of sixteen percent for new products or processes is expected and Mr. Reynolds guidance is that he “tended to look for at least 4 percent more than the company standard before becoming enthusiastic about a project.” With the labor-intensive option, the Silicone-X project should be undertaken. One of the key advantages that weigh in favor of undertaking the Silicone-X project, outside of the NPV evaluation, is that with the labor- intensive option, Silicone-X could be on the market within a year. With the capital-intensive option the plant will likely take “two years to get the plant on stream, and the first year’s operating volume was likely to be low-perhaps 700,000 pounds at the most.” So, with the capital option plant, the first two years would have zero production and the third year would have almost two thirds the plant as unused capacity. Soderberg states that he is unsure of the demand for Silicone-X and indicates that the demand could be as low as 500,000 pounds and as high as 2 million pounds. In the event that Silicone-X only generates demand of 500,000 pounds, the remaining
After completing the analysis and reviewing the NPVs and IRRs for each option, labor intensive and capital intensive, Soderberg should recommend that the Jacobs division move forward with production of Silicon-X using the labor-intensive option. The NPV and IRR methods make the same decisions if used for independent projects however, since these projects are mutually exclusive, the best NPV option should be used. In this case the NPV for the labor-intensive option is positive at twelve percent, sixteen percent and twenty percent while the capital option is only positive at twelve percent and sixteen percent. The labor-intensive option meets the expectations for both the company guidelines and Mr. Reynolds’ personal guidance for the Jacobs Division. The company guidelines state that a return of sixteen percent for new products or processes is expected and Mr. Reynolds guidance is that he “tended to look for at least 4 percent more than the company standard before becoming enthusiastic about a project.” With the labor-intensive option, the Silicone-X project should be undertaken. One of the key advantages that weigh in favor of undertaking the Silicone-X project, outside of the NPV evaluation, is that with the labor- intensive option, Silicone-X could be on the market within a year. With the capital-intensive option the plant will likely take “two years to get the plant on stream, and the first year’s operating volume was likely to be low-perhaps 700,000 pounds at the most.” So, with the capital option plant, the first two years would have zero production and the third year would have almost two thirds the plant as unused capacity. Soderberg states that he is unsure of the demand for Silicone-X and indicates that the demand could be as low as 500,000 pounds and as high as 2 million pounds. In the event that Silicone-X only generates demand of 500,000 pounds, the remaining