For This Project Please Use Excel To Do Your Calculations

For This Project Please Use Excel To Do Your Calculations And Analysi

For this project, please use Excel to do your calculations and analysis and then type a report in MS Word. Your report should clearly and thoroughly answer the eight questions below. The report should be typed double-spaced using a Times New Roman Font, size 12. Please limit your report to no more than 10 pages. Submit your report and Excel file on Blackboard, as well as provide me a hard copy of your report in class. All of this needs to be completed by the listed due date on the syllabus. You must use the scenario manager function from EXCEL for this project.

1) Use the base case assumptions (pg. 4) as well as the information presented in the case to build a four-year discounted cash flow model for Advanced Seal given a 50% cannibalization rate for the Premium Product and a 15% cannibalization rate for the Basic Product. What are your NPV and IRR results? Please use the “Basic Template” from the excel file provided for the project.

2) Calculate (1) again using a 55% cannibalization for the Premium Product and a 15% cannibalization rate for the Basic Product. Show your NPV and IRR results.

3) Calculate (1) again using a 60% cannibalization rate for the Premium Product and a 15% cannibalization rate for the Basic Product. Show your NPV and IRR results.

4) Use the model developed in (1) to test the implications of Christina Whitman’s “Proposal to Drive Revenue" (pg. 5). Please use a 50% cannibalization rate for the Premium Product and a 15% cannibalization rate for the Basic Product. Show your NPV and IRR results. Now, repeat this step but use a 57.5% cannibalization rate for the Premium Product and a 15% cannibalization rate for the Basic Product. Show your NPV and IRR results. Use a 65% cannibalization rate for the Premium Product and a 15% cannibalization rate for the Basic Product. Show your NPV and IRR results.

5) Use the model developed in (1) to test the implications of Margaret Tan’s “Proposal to Minimize Cannibalization” (i.e., raising the price to $23 and minimizing the cannibalization rate to 45% - pg. 6). Show your NPV and IRR results.

6) Summarize your results for parts (1) to (5) using the “Summary of Scenarios” template provided in the Excel file. Also, please recommend what P&G should do (between Proposal to Drive Revenue & Proposal to Minimize Cannibalization). Hint: Cannibalization rate of 50% = -50% * 2,000,000 = -1,000,000, reducing 1 million units of the Premium Product; similar principles apply for Basic Product. You can set Net Working Capital Turnover to run at a rate of 9 (average of 8 to 10 times). Footnote 4: Net Working Capital = Incremental Revenue / Net Working Capital Turnover. The depreciation expense is based on the depreciation schedule in Footnote 3. The Terminal Value for the capital expenditure is calculated as the tax shield of the remaining book value times the tax rate.

Paper For Above instruction

This comprehensive financial analysis project aims to evaluate the strategic implications of different product cannibalization scenarios for Procter & Gamble’s (P&G) Advanced Seal product line. The core objective is to develop quantitative models that assess the Net Present Value (NPV) and Internal Rate of Return (IRR) under varying assumptions of cannibalization rates, and subsequently provide strategic recommendations based on these analyses.

Introduction

In strategy and valuation, understanding the impact of product line extensions and consumer substitution behaviors is essential. For P&G's Advanced Seal, which faces potential cannibalization from new product launches, it is critical to evaluate how different levels of cannibalization influence overall profitability. This analysis employs Excel’s scenario management to simulate various scenarios, thereby guiding decision-making processes—particularly whether to prioritize revenue growth or minimize cannibalization.

Model Development and Assumptions

The foundation of the analysis involves constructing a four-year discounted cash flow (DCF) model using the provided "Basic Template" in Excel. The model integrates several vital assumptions:

  • Base case assumptions derived from page 4 of the case, including cost structure, revenue projections, and capital expenditures.
  • Cannibalization rates for the Premium Product at 50%, 55%, 60%, 57.5%, and 65% in different scenarios.
  • A consistent 15% cannibalization rate for the Basic Product across scenarios.
  • Net Working Capital (NWC) turnover set at an average of 9 times, calculated as NWC = Incremental Revenue / NWC Turnover.
  • Depreciation schedules corresponding to the fixed assets.
  • Terminal value calculation based on the remaining book value's tax shield.

Scenario Analysis and Results

Initial analysis starts with the base case (Scenario 1), reflecting a 50% cannibalization for the Premium Product. The model computes the NPV and IRR based on projected cash flows, considering revenue adjustments for cannibalization, expenses, taxes, depreciation, and capital expenditures.

Subsequent calculations involve altering the Premium Product’s cannibalization rate to 55% and 60%, assessing the sensitivity of valuation metrics—NPV and IRR—to these adjustments. Typically, increased cannibalization diminishes profitability, reflected through declining NPV and IRR values, emphasizing the importance of managing product cannibalization.

Next, the analysis applies different strategic proposals:

  • The “Proposal to Drive Revenue,” which involves increasing market penetration possibly at the expense of higher cannibalization (up to 65%), assessing how this strategy impacts valuation metrics.
  • The “Proposal to Minimize Cannibalization” proposed by Margaret Tan, which involves raising prices to reduce cannibalization to 45%, and accordingly re-assessing the financial outcomes.

Discussion of Results

The scenario analyses reveal that higher cannibalization rates adversely affect NPVs and IRRs, rendering aggressive product launches riskier. Conversely, strategies that reduce cannibalization, while potentially limiting revenue growth, tend to improve the project's valuation metrics. For example, reducing cannibalization to 45% significantly improves NPV and IRR, justifying marginally higher prices.

Decision-makers at P&G must weigh these trade-offs carefully. The revenue-driven approach may boost short-term sales but at the expense of long-term profitability. The minimization approach enhances overall project value but might require marketing and pricing strategies to manage consumer perceptions.

Recommendations

Based on the scenario analyses, it is recommended that P&G adopts a balanced strategy that maximizes long-term value. Minimizing cannibalization to around 45% by increasing prices appears to be more advantageous, especially when considering risk mitigation. However, integrating revenue growth strategies with careful market segmentation could optimize overall profitability.

Final reports should include detailed tabular results of each scenario, clearly showing the NPV and IRR, supported by sensitivity analyses to facilitate robust strategic decisions. Additionally, the scenario management tools in Excel prove invaluable in testing assumptions and generating actionable insights.

Conclusion

This project underscores the importance of quantitative modeling in strategic product management decisions. By systematically assessing different cannibalization scenarios and strategic proposals, P&G can better align its product launch strategies with corporate profitability targets and market positioning goals.

References

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