PLEASURE CRAFT INC. Harvard Case Solution & Analysis

PLEASURE CRAFT INC. Case Solution

Decision Problem

            Pleasure Craft Incorporation (PC), the manufacturer of personal watercraft and snowmobiles is seeking to expand its business. The sales of the products within the two business segments of the company have reached its maturity stage. Both of these segments were not offering the company with strong potential for growth in the future years. Therefore, in order to sustain the growth of the company, the management was considering investing in two options.

The first option was to invest in the business of front end loaders which would be sold to ranchers, farmers, construction companies and military and municipal. The second option was to manufacture outboard motors. Nancy Cummins was assigned to analyze both of these projects along with her team by determining the future cash flows, costs of capital and the initial cash flows for both the projects. We would be analyzing this case by taking the position of an independent consultant and then make a final recommendation to PC management based on a number of quantitative and qualitative factors.

Evaluation of the Projects

            The evaluation of both the projects would be performed on the basis of the qualitative and the quantitative factors. The initial costs, annual cash flows and the cost of capital for both the projects would be computed and then the net present value and the internal rate of return for both the projects would be calculated. Apart from this, the availability of the financing options would be evaluated for both the projects independently and then a final recommendation would be made to the management of PC.

Front End Loader Project

            The first project which would be evaluated in this report is the Front End Loader Project. This is the first option available to the management of the company. The company could manufacture small front end loaders which could be then sold to the ranches, farmers, construction companies, the military and the municipal governments. The main challenge for the company under this project was that the management of PC will have to made sales in a market where the company had zero sales experience. Therefore, in order to make this project successful a sales team will need to be developed and sales managers, regional managers and other sales people will also need to be hired.

Annual Cash Flows

            The annual cash flows for this project have been calculated as shown in the excel spreadsheet. This project would have a total life of 15 years after which the management of PC would consider its options related to the product line. In computing the annual cash flows, the initial purchases of the land, equipment and the building would take place in year 0. The net investment has been converted into the gross investment using the formula:

Initial Investment/ (1-Weighted Average Floatation Costs)

            The weighted average floatation costs for the overall company have been computed on the basis of the target capital structure of 30% debt and 70% equity of the company. The costs of issuing new equity and debt are 8% and 3% respectively. This gives us a weighted average of the flotation costs of 6.5%. The calculations could be seen in the excel spreadsheet. Finally, all the other calculations for the net cash flows of the project including the salvage values in year 15 could be also seen in the excel spreadsheet.

Weighted Average Cost of Capital

            The front end loader business segment represents a riskier business for PC because construction is considered more cyclical as compared to recreational vehicles. Moreover, this business segment was also subject to intense foreign competition due to low wage emerging economies such as China........................

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