The Dilemma at Day Pro
12
Comparison of Capital Budgeting Techniques
The Dilemma at Day-Pro
The Day-Pro Chemical Corporation, established in 1995, has managed to earn a consistently high rate of return on its investments. The secret of its success has been the strategic and timely development, manufacturing, and marketing of innovative products that have been used in various industries. Currently, the management of the company is considering the manufacture of a thermosetting resin as packaging material for electronic products. The Company’s Research and Development teams have come up with two alternatives: an epoxy resin, which would have a lower startup cost, and a synthetic resin, which would cost more to produce initially but would have greater economies of scale. At the initial presentation, the project leaders of both teams presented their cash flow projections and provided sufficient documentation in support of their proposals. However, since the products are mutually exclusive, the firm can only fund one proposal.
Case 12
The Dilemma at Day-Pro
49
In order to resolve this dilemma, Mike Matthews, the Assistant Treasurer, and a recent MBA from a prestigious mid-western university, has been assigned the task of analyzing the costs and benefits of the two proposals and presenting his findings to the board of directors. Mike knows that this will be an uphill task, since the board members are not all on the same page when it comes to financial concepts. The Board has historically had a strong preference for using rates of return as its decision criteria. On occasions it has also used the payback period approach to decide between competing projects. However, Mike is convinced that the net present value (NPV) method is least flawed and when used correctly will always add the most value to a company’s wealth. After obtaining the cash flow projections for each project (see Tables 1 & 2), and crunching out the numbers, Mike realizes that the hill is going to be steeper
Comparison of Capital Budgeting Techniques
The Dilemma at Day-Pro
The Day-Pro Chemical Corporation, established in 1995, has managed to earn a consistently high rate of return on its investments. The secret of its success has been the strategic and timely development, manufacturing, and marketing of innovative products that have been used in various industries. Currently, the management of the company is considering the manufacture of a thermosetting resin as packaging material for electronic products. The Company’s Research and Development teams have come up with two alternatives: an epoxy resin, which would have a lower startup cost, and a synthetic resin, which would cost more to produce initially but would have greater economies of scale. At the initial presentation, the project leaders of both teams presented their cash flow projections and provided sufficient documentation in support of their proposals. However, since the products are mutually exclusive, the firm can only fund one proposal.
Case 12
The Dilemma at Day-Pro
49
In order to resolve this dilemma, Mike Matthews, the Assistant Treasurer, and a recent MBA from a prestigious mid-western university, has been assigned the task of analyzing the costs and benefits of the two proposals and presenting his findings to the board of directors. Mike knows that this will be an uphill task, since the board members are not all on the same page when it comes to financial concepts. The Board has historically had a strong preference for using rates of return as its decision criteria. On occasions it has also used the payback period approach to decide between competing projects. However, Mike is convinced that the net present value (NPV) method is least flawed and when used correctly will always add the most value to a company’s wealth. After obtaining the cash flow projections for each project (see Tables 1 & 2), and crunching out the numbers, Mike realizes that the hill is going to be steeper