The Jacobs Division
In determining whether or not to undertake the Silicone-X project, Mr. Soderberg should proceed as follows: First he should complete analysis on the Net Present Values and IRR’s of each the options; the labor intensive and the capital intensive. After reviewing the results, it would be obvious to Mr. Soderberg that he should recommend that the Jacobs division move ahead with production of the Silicon-X operating with the labor-intensive option. The NPV for the labor-intensive option is positive (acceptable) at 12, 16 and 20 % while the capital-intensive option is only positive at 12 and 16 %. Not only that, but the labor-intensive option meets the expectations for both the company guidelines and Mr. Reynolds’ 4 % above company expectations personal rule for undertaking new projects for the Jacobs Division. The major takeaway and conclusion that Mr. Soderberg would hopefully realize from the results of the research is that even though the NPV and IRR methods appear to make the same decisions (both positive and “acceptable” under financial terms) if projects are used independently, the labor intensive project should be chosen since the projects are mutually exclusive. The best NPV option (the labor intensive) should therefore be used. Another advantage in favor of undertaking the Silicone-X project and using the labor-intensive option is that Silicone-X could be on the market within one year’s time (compared to the two years it would take for the capital option) and that the required start-up costs for using labor is only $900,000 compared to $3.3 million for using the capital intensive option. Another one of Mr. Reynolds personal opinions in regards to choosing a project to undertake is the disregarding the Discounted Rate of Return, in favor of the simple total return of a project in three years time. It is easy to tell that the labor option would have the higher total return on the short run (3 years) than the capital, even...
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