This case is primarily about deciding on the choice of a new project based on financing methods. Flash is a small firm focused on the computers and electronic chip segment. This is a segment with a very dynamic operation with constant need for innovation and research. This called for constant investment through the working capital for the firm. With immense competition, small product life and significant investment, this business offered only very low profit margins.
The industry offered a prospect of very high growth rate with tremendous growth projections in sales for Flash memory. The life cycle for its products was very short, which meant that maximum revenue generation happened within a few years of the product launch. Normally, each new innovative product would become obsolete within an average of 6 years. Flash resorted to aggressive spending on research and investment which enabled it to maintain its advantage in this competitive industry. With regards to its financing, currently Flash is financed through short term loans as notes payables to the tune of 70% of its Accounts Receivables.
As sources of financing required for initiating a new project, Flash had two options. Either through an enhanced credit limit (more than 70% of AR), or through issuance of stock to the tune of 300,000 shares at a value of $ 23. But extending the credit limit would lead to an increase in the cost of debt. New Opportunity
Flash Memory had immense growth projections for 2-3 years ahead fuelled by high investment in R&D. Recently; there was a new opportunity for developing a product. There had been a significant investment to the tune of $ 400 k for its development. It was projected that this new project would bring about sales of 21.6 m, 28 m, 28m, 11m and 5 m in the years 2011, 2012, 2013, 2014 and 2015 respectively. Even though the firm operated under low profit margins, this product was a very innovative product which enabled Flash Memory to command...