Abercrombie Inc.: Case Study
Abercrombie, Inc. Case Study
Problem
Abercrombie, Inc. is faced with the decision of how best to grow their company given their current available investment opportunities.
There are some unique issues to consider while analyzing these investment opportunities. Abercrombie has been at most a two-product company throughout its history as a firm, thus adding additional product lines could potentially strain the company’s production and overheard allocation. Furthermore, presses are formatted for solely one customer and cannot be altered to meet alternative production specifications. Because of this there are high switching costs as well as low scrap value, creating a necessity for long-term commitments from clients.
Investment Opportunities
There are several investment opportunities that are currently available to Abercrombie in addition to their current production operations. Firstly, the company could print white pages only and keep the plant located in St. Paul. Secondly, the company could print white pages in St. Paul and build a plant in Tucson for the production of yellow pages. Thirdly, Abercrombie has the option of printing both white and yellow pages in Tucson. Lastly, Abercrombie could re-enter the magazine industry and print magazines in San Jose, CA.
Suggested Investment Action
We recommend that Abercrombie, Inc. Invest in the land in Tucson and produce both the white and yellow pages within that plant, as it yields the highest Net Present Value (NPV) of the four options.
Substantiation
Due to the nature of the industry and the machinery required, it is imperative that we enter into a long term contract with our clients. In valuing these contracts we must factor in the initial investment outlays for machine set-up costs (including the purchasing of new land), as well as all future cash flows of a given project. To do this we use a form of analysis known as Net Present Value (NPV). In calculating the NPV of each investment we made
Problem
Abercrombie, Inc. is faced with the decision of how best to grow their company given their current available investment opportunities.
There are some unique issues to consider while analyzing these investment opportunities. Abercrombie has been at most a two-product company throughout its history as a firm, thus adding additional product lines could potentially strain the company’s production and overheard allocation. Furthermore, presses are formatted for solely one customer and cannot be altered to meet alternative production specifications. Because of this there are high switching costs as well as low scrap value, creating a necessity for long-term commitments from clients.
Investment Opportunities
There are several investment opportunities that are currently available to Abercrombie in addition to their current production operations. Firstly, the company could print white pages only and keep the plant located in St. Paul. Secondly, the company could print white pages in St. Paul and build a plant in Tucson for the production of yellow pages. Thirdly, Abercrombie has the option of printing both white and yellow pages in Tucson. Lastly, Abercrombie could re-enter the magazine industry and print magazines in San Jose, CA.
Suggested Investment Action
We recommend that Abercrombie, Inc. Invest in the land in Tucson and produce both the white and yellow pages within that plant, as it yields the highest Net Present Value (NPV) of the four options.
Substantiation
Due to the nature of the industry and the machinery required, it is imperative that we enter into a long term contract with our clients. In valuing these contracts we must factor in the initial investment outlays for machine set-up costs (including the purchasing of new land), as well as all future cash flows of a given project. To do this we use a form of analysis known as Net Present Value (NPV). In calculating the NPV of each investment we made