This scenario analysis is centered around a fictitious company in the medical de
ID: 2404507 • Letter: T
Question
This scenario analysis is centered around a fictitious company in the medical device equipment industry. It will test your ability to make a recommendation on new capital investment projects. To do this you will be required to answer two fundamental questions: 1) what are the projected cash flow for each product launch, and 2) what products would you launch and why.
Provide a brief 2-3 paragraph analysis justify your recommendation. You can use bullet points to highlight your main points. More importantly include an additional excel file to show your 5-year cash flow analysis broken out by year for each product launch. Also, include the relevant metrics that you used to evaluate the economic worth for each product that formed the basis of your recommendation.
The attached document contains the background information on this fictional company and the relevant financial assumptions surrounding each product launch. Again, please note that scenario analyses can be fairly ambiguous. In the “Background and History” and "Solutions" sections of this scenario I have provided you with most of the critical assumptions and data points that you will need to complete your analysis and recommendations. However, you will find that there are times when you will need to make an assumption to defend your recommendation. This is a fundamental part of the this assignment as it tries to mimic the "real word" were many times an organization leader will be forced to make a decision without perfect knowledge. In your analysis clearly state the assumptions that you are making that are in addition to that ones that have been provided to you. In these situations I will be evaluating the reasonableness of the assumptions that you make along with the persuasiveness of your argument. With this type of analysis there is usually no one right answer. With this in mind, I will be evaluating the strength of your argument based on how well you are able integrate course content and theory.
Photonic's Product Launches- The Situation In the summer of 2015, Photonics, a leader in the production of biometric sensors, started to experience a decline in sales growth for one of their most popular products, ??Alert, onalert was launched in 2011 and quickly became the industry standard in analyzing the oxygen levels of surgically repaired tissue after emergency care procedures. In the first year of sales this product captured 25% of the market in post operation biometric devices. By the second year it had rapidly overtaken the industry leaderwith a 55% share ofthe market. The success of this productwas primarily due to innovative features that were not found on any other product. Features such as wireless disposable sensor probes and advance analytic software allowed doctors to shorten the recovery time of their patients in ICU units which decreased per patient ICU expense by 10%. Based on these innovative features Photonics was able to charge a premium for this product and establish themselves as one of the most profitable companies in the industry.* Several competitors have now closed the gap in product design and| functionality. In the fall of 2014, SeaBridge, one of Photonics biggest rivals launched the product TotalDiagnostic This product contains similar disposable sensory technology as OxyAlert however, it allows doctors to analyze a broader range of a patient's biometrics. While this product was priced around 10% higher than OxyAlert, doctors had the added advantage of not only maintaining the same recovery rates but also decrease the rate of post surgical infection by 15%. By February of 2015,TotalDiagnostie had captured 30% of the market. +' Photonics response was swift. They immediately reduced the price of Oxy Alertby 20% in order to regain market share. From March through May, sales of OxyAlert rebounded. While profit margins of the company did take a hit, it appeared thatthe price reduction stabilized the company's market share. Unfortunately, recent sales reports from June showthatpre-orders for OxyAlert are significantly down. Asthe CFO of Photonics you are worried that Oxylert has become an obsolete product and further price reduction will have very little impact on sales growth.Explanation / Answer
Solutions:- All along, you and Dr.Walker have known that five years was the typical product life cycle in this industry . Fortunately,you employ some of the brightest engineers in the field who have been developing three new interesting products that could restore your company's sales growth. The first product is completely new to the industry and will allow doctors in emergency rooms to diagnose preexisting conditions of incapacitated patients through breathalyzer tests. This products is codenamed "ActoAnalytics". The third product is a complimentary product to oxyAlert that will enhance OxyAlert's diagnostic capabilities. This product is codenamed "Diagnostic Solutions".
The following are brief descriptions of each product's financial costs and revenue projections:
OxyAlert:Your marketing department believes that this product will not completely replace OxyAlert , as there will still be some companies who will want the older and cheaper version.By introducing this new product , sales of OxyAlert is forecasted to steadily decrease by 20% each year over the next 5 years.
"AutoAnalytics": This product is neither a complimentary product nor a replacement product for OxyAlert. The launch of this product is intended to create a new product line by extending photonics core competencies into the emergency resp market.Prior years development cost for this product has totaled $1.5 million dollars.
"Diagnostic Solutions":
Diagnostic Solutions is a serious of networked probes that will allow customers to use OxyAlert in more efficient ways. Marketing believes that this complimentary product will actually help the sales of OxyAlert and prevent the full adoption of your competitors product.
Decisions:-
As the year progresses, investors and creditors are getting nervous that your company cannot maintain it's leadership position within the industry.They still believe in your management team and your company ability to produce innovative products.As a result you have the ability to access up to $30million dollars from your financiers.Your creditors are willing to loan you money at a 6% interest rate.While your investors expect a return of 12% on their equity.Based on the required returns on equity and debt, the company s weighted-average cost of capital is 9.48% on all projects, assume a30% tax rate on income. In order to support your recommendation, you will need to integrate the principal of capital budgeting decision making in your analysis.
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