The Management Team of Pleasure Craft INC.
Subject: Expanding Production
September 29, 2010
Since beginning 40 years ago, Pleasure Craft INC. has been successful in both the domestic and international marketplace. Currently producing two products, snowmobiles and personal watercraft, both of which have become mature markets and thus giving little room to grow, two options have been determined to further the growth of Pleasure Craft INC.. First being to start production on outboard motors. This option allows Pleasure Craft INC. to remain in a familiar market, utilizing current contacts and sales tactics. The second option draws upon Pleasure Craft INC.’s experience with small engine manufacturing but unfamiliar sales market, which is producing front end loaders. Front end loaders would be sold to construction companies, farmers, ranchers, the military and to municipal governments. Pleasure Craft INC. would sell the front end loaders to retailers to serve the construction, farming and ranching markets. But sell directly to the military and municipal governments. The sales of the front end loaders would require a new sales staff, entirely dedicated to this products sales. A national sales manager, two regional sales managers as well as 10 sales staff would need to be hired.
The Outboard Motor Project
This expansion, of producing outboard motors, would allow the company to remain in the leisure craft market and utilize its established selling network. To determine which of the two projects are financially more pleasing we need to use calculations to determine the value of the beta, WACC, NPV and IRR. Fist we want to calculate the net working capital (NWC). The NWC turnover ratio for this new operation was expected to be 6:1.( NWC turnover = Sales/ NWC = 6/ 1 = 3,500,000 / NWC. Thus, NWC = $ 583,333.33); then we find the project outboard’s beta is 1.377. For the outboard motors project we...
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