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Case 1 Answer

The document discusses three alternative strategies - Accounting, Marketing, and Manufacturing - for Taylor Corporation to increase its market share over three years. It provides information on the current costs and revenues. It then calculates the net present value (NPV) of each strategy's cash flows discounted at 10% to determine which has the highest NPV and is most advantageous. The Marketing strategy has the highest NPV of $136,251. The recommendations conclude the Marketing strategy is the optimal choice and discuss how the optimal capital cost and structure can be determined.

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Edwin Espiritu
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640 views10 pages

Case 1 Answer

The document discusses three alternative strategies - Accounting, Marketing, and Manufacturing - for Taylor Corporation to increase its market share over three years. It provides information on the current costs and revenues. It then calculates the net present value (NPV) of each strategy's cash flows discounted at 10% to determine which has the highest NPV and is most advantageous. The Marketing strategy has the highest NPV of $136,251. The recommendations conclude the Marketing strategy is the optimal choice and discuss how the optimal capital cost and structure can be determined.

Uploaded by

Edwin Espiritu
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd

Problem Statement

Important Matters/ Points to Consider


Alternative Course of Actions (ACA's)
Recommendations/Conclusions
Problem Statement
Taylor Corporation to choose from three possible strategies namely: Accounting Strategy, Marketing Strategy, and

Important Matters/ Points to Consider


1. Project is not independent and restricted to a financing constrains of $500,000, at an optimum cost of capital of 1

2. Current operational cost-based revenues and costs for the company as follows: Current market
share volume
Current sales @$100 per unit $1,000,000 10,000
less: Volume-related variable costs -$500,000 -50%
less: Non-Volume-related variable costs -$300,000 -30%
Cash-based EBIT $200,000

Salling price per unit 100


less: Volume-related variable costs -50
CM/unit 50
less: Non-Volume-related variable costs -30 -30
Cash-based EBIT 70

3. Expected to increase cost on non-volume-ralated costs by 10% of current expenditure levels as market share inc

Alternative Course of Actions


Investments
Y0 Y1 Y2 Y3
Accounting Strategic C $100,000 $ 100,000 - $ -
Marketing Strategic Cos $200,000 $ 165,000 $ 50,000 $ 30,000
Manufacturing Strategi $500,000 $ 500,000 - -

(a) Calculate the NPV under the "Accounting Strategy"


Y0 Y1 Y2 Y3
Accounting Stratigic Co (100,000) 0 0 0
Fixed Cost 0 (30,000) (30,000) (30,000)
Total Outflow (100,000) (30,000) (30,000) (30,000)
5% Inflow 0 125,000 125,000 125,000
5% Net Cash Flow (100,000) 95,000 95,000 95,000

10% Disc Factor 1 0.91 0.83 0.75


(100,000) 86,364 78,512 71,375

(b) Calculate the NPV under the "Marketing Strategy"

Y0 Y1 Y2 Y3
Accounting Stratigic Co (200,000) (165,000) (50,000) (30,000)
Fixed Cost 0 (30,000) (30,000) (30,000)
Total Outflow (200,000) (195,000) (80,000) (60,000)
5% Inflow 0 250,000 250,000 250,000
5% Net Cash Flow (200,000) 55,000 170,000 190,000

10% Disc Factor 1 0.91 0.83 0.75


(200,000) 50,000 140,496 142,750

c Compare the Accounting vs. Marketing NPVs' and discuss the advantage and disadvantages under each stra

d Calculate the NPV under the Manufacturing Strategy. Discuss the cost-benefit aspects of making FMS invest

Recommendations/Conclusions
What is optimum capital cost?
An optimal capital structure is the best mix of debt and equity financing that maximizes a company
Marketing Strategy, and Manufacturing Strategy, to increase market share of the company given three-year period of time.

ptimum cost of capital of 10% per annum.

per 1% market
share
500

levels as market share increase between 25% and 50%.

Expected Market Share Increase (%)


Y0 Y1 Y2 Y3
20% 25% 25% 25%
20% 30% 30% 30%
20% 20% 20% + 50%

Total
(100,000)
(90,000)
(190,000)
375,000
185,000

136,251

Total
(445,000)
(90,000)
(535,000)
750,000
215,000

133,246

vantages under each strategy. Which strategy should the Taylor Corporation choose?

cts of making FMS investments as against the Accounting and Marketing Strategies.
maximizes a company's market value while minimizing its cost of capital. Minimizing the weighted average c
year period of time.
weighted average cost of capital (WACC) is one way to optimize for the lowest cost mix of financing.
ix of financing.

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