Burton Sensors. Inc Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Burton Sensors. Inc Case Solution

Question No 4

Marshall should not adopt the option of Electro Engineering Incorporation’s acquisition. It is because,the company is generating a negative net present value of $2,388.3 and a negative internal rate of return i.e. – 13.97% (Appendix 2). Furthermore, if the acquisition of EE Incorporation generates a zero NPV;it would still not be recommended because it involves a very high opportunity cost, as a zero NPV indicates the project’s inflows to be equal to the outflows. The acquisition of EE will not provide long term benefits to the company and it would not increase the shareholders’ value.

Question No 5

The company would not be able to attain the benefit of EE acquisition in its balance sheet and income statement. In order to acquire the EE Company; the company would certainly need to generate financing, which is mainly focused on equity financing. However, the financial analysis of EE acquisition shows that the company would not generate wealth for its shareholders as it is generating a negative net present value as well as a negative internal rate of return. It would decrease Marshall’s market position. Therefore, the company is recommended to issue further stock as private equity in order to meet its future expansion options. By utilizing this option, the company should purchase the Thermopylae machines, as its beneficial for the company, enabling it to maintain a sustainable competitive advantage in the industry.

Appendices

Appendix 1

WACC
Risk Free Rate, rfr	3%
Risk Premium, rpm	6.50%
Rate on Debt, rd	4.80%
Rd(1-T)	3.12%
Beta (Based on comparable company)	1.25
Rate on Equity	11.10%

Weight of debt, wd	84.7%
Weight of equity, we	15.3%
Tax Rate	35.0%
WACC	4.3%

Purchase of Thermowell Machines
Industry CAGR	4.50%
Outside Purchase - Savings	$ 1,400,000
Initial Cost of Thermowell Machines	$ 600,000
Number of machines	4
Useful life in Years	7
Salary expense	$ 170,000
Material & Rent Expense	$ 780,000
Working Capital	$ 650,000

	2016	2017	2018	2019	2020	2021	2022	2023
Initial Cost Outlay	$ 600,000
WCI	$ 650,000
Cost Savings		1,400,000	1,463,000	1,528,835	1,597,633	1,669,526	1,744,655	1,823,164
Less: Expenses
Salary expense		$ 170,000	$ 170,000	$ 170,000	$ 170,000	$ 170,000	$ 170,000	$ 170,000
Material & Rent Expense		$ 780,000	$ 815,100	$ 851,780	$ 890,110	$ 930,165	$ 972,022	$ 1,015,763
Depreciation		$ 85,714	$ 85,714	$ 85,714	$ 85,714	$ 85,714	$ 85,714	$ 85,714
Total Income		$ 364,286	$ 392,186	$ 421,341	$ 451,809	$ 483,647	$ 516,919	$ 551,687
Add: Depreciation		$ 85,714	$ 85,714	$ 85,714	$ 85,714	$ 85,714	$ 85,714	$ 85,714
Less: Taxes		$ 127,500	$ 137,265	$ 147,469	$ 158,133	$ 169,277	$ 180,921	$ 193,090
Total Cash outflow/ Inflows	($1,250,000)	$ 322,500	$ 340,635	$ 359,586	$ 379,390	$ 400,085	$ 421,711	$ 444,311
Net Present Value, NPV	$947,555.38
Internal Rate of Return, IRR	21.97%

Appendix 2

WACC
Share Value		$4.75
Risk Free Rate		3%
Equity Risk Premium		5.80%
Rate on debt		6.50%
Weight of Debt		40.24%
Weight of Equity		59.76%
Tax Rate		35%
Equity beta		1.235
Rate of debt		10.16%
WACC		7.8%

NPV- Electro Engineering Inc
	2016	2017	2018	2019	2020	2021
Initial Investment	$ 5,225.00
Sales	$ 4,072.70	$ 5,050.15	$ 5,933.92	$ 6,824.01	$ 7,642.89	$ 8,407.18
Increase in Sales		$ 977.45	$ 883.78	$ 890.09	$ 818.88	$ 764.29
Reduction in COGS		$ 135.34	$ 159.03	$ 182.88	$ 204.83	$ 225.31
Reduction in SG&A		$ 101.00	$ 118.68	$ 136.48	$ 152.86	$ 168.14
Increase in A/c Payable		$ 7.88	$ 7.88	$ 7.88	$ 7.88	$ 7.88
Total Cash Inflows		$ 1,221.67	$ 1,169.36	$ 1,217.33	$ 1,184.45	$ 1,165.63
Less: Expenses
R&D		$ 272.68	$ 320.39	$ 368.45	$ 412.67	$ 453.93