Fromm’s estimate of growth capital expenditure included in Omikroon’s property, plant, and equipment under Scenario 2 should be:

A. lower than under Scenario 1.

B. the same as under Scenario 1.

C. higher than under Scenario 1.

Gertrude Fromm is a transportation sector analyst at Tucana Investments. She is conducting an analysis of Omikroon, N.V., a publicly traded European transportation company that manufactures and sells scooters and commercial trucks.
Omikroon’s petrol scooter division is the market leader in its sector and has two competitors.
Omikroon’s petrol scooters have a strong brand-name and a well-established distribution network. Given the strong branding established by the market leaders, the cost of entering the industry is high. But Fromm anticipates that inexpensive imported small petrol-fueled motorcycles may become substitutes for Omikroon’s petrol scooters.
Fromm uses return on invested capital as the metric to assess Omikroon’s performance.
Omikroon has just introduced the first electric scooter to the market at year-end 2014.

The company’s expectations are as follows:
• Competing electric scooters will reach the market in 2016.
• Electric scooters will not be a substitute for petrol scooters.
• The important research costs in 2015 and 2016 will lead to more efficient electric scooters.

Fromm decides to use a five-year forecast horizon for Omikroon after considering the following factors:
Factor 1: The annual portfolio turnover at Tucana investments is 30%.
Factor 2: The electronic scooter industry is expected to grow rapidly over the next 10 years.
Factor 3 : Omikroon has announced it would acquire a light truck manufacturer that will be fully integrated to its truck division by 2016 and will add 2% to its total revenues.

From uses the base case forecast for 2015 shown in Exhibit 5 to perform the following sensitivity analysis:
• The price of an imported specialty metal used for engine parts increases by 20%.
• This metal constitutes 4% of Omikroon’s cost of sales.
• Omikroon will not be able to pass on the higher metal expense to its customers.

Transcribed Image Text:

EXHIBIT 5 Omikroon's Selected Financial Forecasts for 2015 Base Case ( millions) Sales Cost of sales Gross profit Operating profit Petrol Scooter Division 99.05 Commercial Truck Division 45.71 Electric Scooter Division Total 7.62 152.38 105.38 47.00 9.20