Jacobs 2003 1

Topics: Net present value, Cash flow, Rate of return, Internal rate of return / Pages: 11 (3029 words) / Published: Mar 9th, 2015
Jacobs Division 2003

Richard Soderberg, financial analyst for the Jacobs Division of MacFad­den Chemical Company, was reviewing several complex issues relating to possible investment in a new product for the following year, 2004. The product was a specialty coating material, which qualified for investment according to company guidelines. Mr. Reynolds, however, the Jacobs Division manager, was fearful that it might be too risky. While regarding the project as an attractive opportunity, Mr. Soderberg believed that the only practical way to sell the product in the short run would place it in a weak competitive position over the long run. He was also concerned that the estimates used in the probability analysis were little better than educated guesses.

Company Background

MacFadden Chemical Company was one of the larger chemical firms in the world, with sales in excess of $10 billion. Its volume had grown steadily at the rate of 10 percent per year throughout the 1980s until 1993; sales and earnings had grown more rapidly. Beginning in 1993, the chemical industry began to experience overcapacity, particularly in basic materials, which led to price cutting. Also, more funds had to be spent in marketing and research for firms to remain competitive. As a consequence of the industry problems, MacFadden achieved only a modest growth of 4 percent in sales in the 1990’s and experienced an overall decline in profits. Certain shortages began developing in the economy in 2002, however, and by 2003, sales had risen 60 percent and profits over 100 percent as the result of price increases and near‑capacity operations. Most observers believed that the shortage boom would be only a short respite from the intensely competitive conditions of the last decade.

The 11 operating divisions of MacFadden were organized into three groups. Most divisions had a number of products centered on one chemical, such as fluoride, sulphur, or petroleum. The Jacobs Division was

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