Investment in New Product Line
University of Waterloo Prepared for Jim Gray October 11, 2012
TO: FROM: DATE: SUBJECT: Introduction
The Board of Directors, Flash Memory Inc. The Finance Team October 11, 2012 Investment in New Product Line
Flash Memory Inc. (herein referred to as “Flash” or the “firm”) is in the critical stage of planning for future operations and expansion. Competitive pressure, rapid market growth, continuous technological developments and high rivalry in the industry have caused Flash to experience increasingly low profit margins and liquidity issues. Our team has analyzed the current situation of your firm and its projected financial position for the future years 2010-2012. We then incorporated an analysis of the potential, new investment opportunity and its effects on future financial position, in order to decide whether your firm should pursue this growth opportunity. Based on our analysis, we strongly recommend investing in the new product line due to its positive net present value. Furthermore, we believe that it will help you maintain your competitive advantage in this rapidly changing industry. The project will address your concerns regarding cash needs and competitive pressure, among others. Ultimately, we predict that investing in the new project should be a strategic priority, as it will allow your company to remain a strong competitor in the electronic memory industry. Company Background Flash Memory Inc. operates in the computer and electronic device memory market. Founded during a high tech boom, the company has historically experienced higher returns as a pioneer in the market. Flash specializes in designing and manufacturing solid state drives and memory modules. These products are then sold to original equipment manufacturers, distributors, and retailers to be used in the end products such as computers and other electronic devices. As a small firm competing for market share against industry giants such as Samsung and Intel, Flash incurred lower profit margins to order to stay competitive. In addition, continuous technological advances
and changing customer needs in the memory industry resulted in short product cycles. This required quick reactions from Flash to produce new products and resulted in a focus on research and development. Despite the external factors of competition and changing technology, Flash focused on creating high quality products, creating a significant competitive advantage against their competitors. Current Financial Situation Based on Flash’s current financial situation, we have forecasted financial statements assuming that Flash does not invest in the new product line and does not issue additional common shares. All assumptions were based on overall economic performance and recent reports of robust sales in the smartphones and netbook markets. Please see Exhibit A for a list of assumptions used in projecting the figures, and Exhibit B for a full set of financial statements for the fiscal years 2010, 2011, 2012. The financial statements show that Flash’s profits have grown 10.8% from 2007-2009 and are expected to grow by 58% from 2009-2011. Comparatively, the SSD market has shown growth of 175% from 20072009 and 155% from 2009-2011. Evidently, there is sufficient market capacity for your firm to pursue further growth and expand your operations. Growth Opportunity The key growth opportunity identified for your firm is to launch a major new product line. This would be a feasible initiative to implement in 2010 due to the positive outcome of our NPV analysis. The net present value of this opportunity is approximately $757,528 (Exhibit C). To arrive at this value, we accounted for all relevant cash inflows, outflows and tax considerations. We based our inflow expectations on sales predictions from our project sponsors, assuming that all sales were collected in the same period. There are also additional assumptions embedded in our...