Energy Gel Case Study

Topics: Net present value, Finance, Investment Pages: 2 (455 words) Published: December 11, 2007
Question 1: What is your assessment of HPC's capital budgeting process currently in place? Would you recommend any improvements? What is the correct method to value the project?

It is mentioned in the case that HPC only carries out financial evaluation after it has completed technical and strategic analysis. This seems to be an incorrect way to do it because you would expect financial to be priority or at least part of the initial analysis on a project.

We also see here that they chose to use the payback period and ROIC in order to evaluate the project. A more accurate tool to use for this evaluation would have been either NPV or IRR.

(If they are evaluating a 7 year period , why are they calculating their ROIC by dividing the 10 year average net income by the average invested capital and not seven?)

Question 2: Does Wickler have to consider costs for overhead and mixing machine usage? Why or why not?

Regarding mixing the machine usage, it makes sense for Wickler to consider these costs. This is firstly because it is unfair for Leiter to cover 100% of the costs of the financing for the machines while Wickler is actually responsible for the usage of 40% now. Secondly, Wickler should only consider taking on the product of energy gel in the first place if it will still be profitable while including the costs of the necessary machinery. According to the projections in the financial statements, it seems as if they will exceed capacity of the machines between the energy bars and gels together. Even more so then Wickler must consider machinery as a cost of his.

Also, we believe he should be taking into consideration the depreciation of the old mixing machine.

Question 3: Should Wickler include potential cannibalization in his estimates?

We do not think it is necessary for these potential costs to be included in Wickler's estimates. We are considering 2 different important issues: firstly, the issue of using the machinery and paying for that and...
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