During week 6 we develop the theory and application of capital budget analysis.

Question

During week 6 we develop the theory and application of capital budget analysis. The theory was robust, the calculations mathematically and logically defined, and many of the real-world problems, likely to be encountered, were addressed. As capital budgeting essentially re-invents the company through major long-term expenditures it is arguably one of the most critical functions that financial management performs. However, based on my personal experiences, extensive empirical data, and antidotal data - many firms routinely experience significant failures in their selection of capital projects.

The assignment for this topic consists if two parts:

1) For your first topic in this conference I would like for you to briefly review either your personal experiences and/or the financial literature to identify and present a description of one actual capital project/product failure and the reasons attributed to the failure. For those of you who do not have personal experiences the following are some illustrated examples of failed projects/products over the last 50 years you may want to look up and consider: -New Coke,- The Iridium Satellite Communication,- the Edsel automobile, Beta (vs. VHS), the Concord SST, and various Dot Coms. Feel free to research others.

In your response please provide financial information regarding the project (what is available): initial outlay, projected cash flows, final dollar losses.

Remember this is a one to two paragraph exercise - do not go overboard - a few hours research and summation is all that’s required. I am interested only in your short, concise description of the project and the major reasons you believe it failed.

2) Synthesize your one-paragraph position on what 3-5 specific factors you believe most likely to contribute to capital project analysis failure.

Explanation / Answer

this is my personal experience working with perfetti van melle , they wanted to enter into the new product category of snacks from their traditional confectionery and gums segment . the project outlay was $ 1,250,000. and projected cash flow from year 2 was $50,000 onwards with average of 25% growth . the actual sales was not as per estimates for 2 years and was closed down   and the tentative loss was $ 1,10,000

the reasons was for its failure was the company assumed with its leadership position in confectionery and gums category to replicate the brand in the snacks market but the dynamics of sales were totally different from yheir traditional market and the distribution network were different . the company priced their product higher with innovative flavours but the consumers purchased for first time but there was no repeat orders . this resulted in low sales and corresponding the costing on product was done on three shifts ruuning with 90% capacity production went haywire

2) the main reasons was product was not having repeat orders and projections went wrong . The branding and sales strategy are different for snacks category and confectionery & gums category . for any capital project the sales projections should be near to estimated projections as the cash inflows determine the success of the project . the asset in project layout cannot be used to for manufacturing different products , there is high chances of failurre if the product is rejected . another important reason of failure is the inappropriate handling of human resources

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