Energy Gel Case Solution
Recommendations
After the analysis, it has been suggested for the company to enter the market of energy gel as soon as possible to have better market share. Further, the company needs to use big sporting events as the golden opportunity to market their product. The company uses ROIC and payback period for the evaluation and decision making for any project when considering the capital budget process. It is suggested to use net present value method and internal rate of return for the better results. Mr. Wickler must also take the consideration for the cost of overhead and mixing machine usage, it would not reflect the true cost of the business if 100% of the cost is applied on the books of energy bars. The cost of capital is 15% and the internal rate of return for the project is estimated to 25%, so when can launch the project. The project has positive NPV even if it uses its own separate facility and 25% of IRR. Although, the company needs to utilize the unused capacity of Quick pro equipment and modify it with $1.5 million investment to have better profitability. The company must use equipment-based costing in order to get perfect reflection of the project.
Exhibits
Exhibit 1: NPV and IRR
Table 1: NPV for the Project
Years |
2000 |
2001 |
2002 |
2003 |
2004 |
2005 |
2006 |
2007 |
2008 |
2009 |
2010 |
| Cost of capital | $ 3,500,000.00 | $ - | $ - | $ - | $ - | $ - | $ - | $ - | $ - | $ - | $ - |
| Net Income | $ - | -1600000 | 1600000 | 2700000 | 3600000 | 4300000 | 4800000 | 5200000 | 5400000 | 5700000 | 6000000 |
| Net Working capital | $ - | 900000 | 1300000 | 400000 | 500000 | 300000 | 400000 | 200000 | 300000 | 200000 | 300000 |
| Add: Depreciation | $ - | 300000 | 600000 | 900000 | 1200000 | 1500000 | 1800000 | 2100000 | 2400000 | 2700000 | 3000000 |
| Interest Expense | $ - | 247500 | 247500 | 247500 | 247500 | 247500 | 247500 | 247500 | 247500 | 247500 | 247500 |
| Cash Flow | $ (3,500,000.00) | $(2,447,500.00) | $ 652,500.00 | $2,952,500.00 | $4,052,500.00 | $5,252,500.00 | $5,952,500.00 | $6,852,500.00 | $7,252,500.00 | $7,952,500.00 | $8,452,500.00 |
| DCF | $ (3,500,000.00) | $(2,128,260.87) | $ 493,383.74 | $1,941,316.68 | $2,317,030.03 | $2,611,420.80 | $2,573,430.01 | $2,576,108.57 | $2,370,855.11 | $2,260,596.83 | $2,089,328.73 |
| NPV | $ 13,605,209.64 | ||||||||||
| IRR | 25% | ||||||||||
Exhibit 2: Cannibalization effect on total contribution
| Cannibalization Effect | ||
| Energy gel Sales (2005) | 15.2 | |
| Energy Bar Sales (2005) | 60.6 | |
| Rate of Cannibalization | 10% | |
| Lost sales for bars | 1.52 | |
| New Sales for energy bars* | 59.08 | |
| Price of energy bar | 2.26 | |
| Price of energy gel | 1.5 | |
| Total Contribution | 156.3208 | |
Exhibit 3: Depreciation for equipment
| Year |
Book Value Year Start |
Depreciation Expense |
Accumulated Depreciation |
Book Value Year End |
| 2000 | $2,000,000 | $133,266.67 | $133,267 | $1,866,733 |
| 2001 | $1,866,733 | $199,900.00 | $333,167 | $1,666,833 |
| 2002 | $1,666,833 | $199,900.00 | $533,067 | $1,466,933 |
| 2003 | $1,466,933 | $199,900.00 | $732,967 | $1,267,033 |
| 2004 | $1,267,033 | $199,900.00 | $932,867 | $1,067,133 |
| 2005 | $1,067,133 | $199,900.00 | $1,132,767 | $867,233 |
| 2006 | $867,233 | $199,900.00 | $1,332,667 | $667,333 |
| 2007 | $667,333 | $199,900.00 | $1,532,567 | $467,433 |
| 2008 | $467,433 | $199,900.00 | $1,732,467 | $267,533 |
| 2009 | $267,533 | $199,900.00 | $1,932,367 | $67,633 |
| 2010 | $67,633 | $66,633.33 | $1,999,000 | $1,000 |
Exhibit 4: Depreciation for modification of building
| Year |
Book Value Year Start |
Depreciation Expense |
Accumulated Depreciation |
Book Value Year End |
| 2000 | $1,500,000 | $66,622.22 | $66,622 | $1,433,378 |
| 2001 | $1,433,378 | $99,933.33 | $166,556 | $1,333,444 |
| 2002 | $1,333,444 | $99,933.33 | $266,489 | $1,233,511 |
| 2003 | $1,233,511 | $99,933.33 | $366,422 | $1,133,578 |
| 2004 | $1,133,578 | $99,933.33 | $466,356 | $1,033,644 |
| 2005 | $1,033,644 | $99,933.33 | $566,289 | $933,711 |
| 2006 | $933,711 | $99,933.33 | $666,222 | $833,778 |
| 2007 | $833,778 | $99,933.33 | $766,156 | $733,844 |
| 2008 | $733,844 | $99,933.33 | $866,089 | $633,911 |
| 2009 | $633,911 | $99,933.33 | $966,022 | $533,978 |
| 2010 | $533,978 | $99,933.33 | $1,065,956 | $434,044 |
| 2011 | $434,044 | $99,933.33 | $1,165,889 | $334,111 |
| 2012 | $334,111 | $99,933.33 | $1,265,822 | $234,178 |
| 2013 | $234,178 | $99,933.33 | $1,365,756 | $134,244 |
| 2014 | $134,244 | $99,933.33 | $1,465,689 | $34,311 |
| 2015 | $34,311 | $33,311.11 | $1,499,000 | $1,000 |
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