Question
1. You are the strategy and expansion manager for Econ Motorbikes. You are evaluating whether to develop a new motorbike line in India or to
1. You are the strategy and expansion manager for Econ Motorbikes. You are evaluating whether to develop a new motorbike line in India or to export the existing motorbike line to India (bike produced at headquarters in the USA). The new motorbike line in India would be developed based on local customer preferences.The existing motorbike that you would export does not align well with local customer preferences. The CFO informs you the current weighted average cost of capital is 10%.
A. The CEO requests that you determine if the options are financially feasible and which one is best financially. You need to show this quantitatively (CEO uses evidence-based decision-making strategies, not hunches). (hint: net present value might be useful - hopefully, you've seen this in finance or decision science...dust off those books...if not...google net present value in excel).
Here is the data needed:
Option 1 - Develop a new motorbike in India.
WACC (cost of capital)=10%
-Initial Investment - $10,000,000
-Forecasted profits:
Year 1=100,000
Year 2=250,000
Year 3 =500,000
Year 4 =1,000,000
Year 5 = 2,000,000
Year 6=2,000,000
Year 7 =5,000,000
Year 8 =5,000,000
Year 9=5,000,000
Year 10=5,000,000
Option 2 - Expanding offerings of an existing product to India.
-Initial Investment - 0
-Forecasted profits:
Year 1= 50,000
Year 2=100,000
Year 3=150,000
Year 4=200,000
Year 5=200,000
Year 6=200,000
Year 7=200,000
Year 8 =200,000
Year 9=200,000
Year 10=200,000
2-Now, the CEO wants you to consider, qualitatively, the risks.
A.What are some risks considering both options you would consider? How might you incorporate those risks into your decisions?
B.After analyzing the risks, you determine there is a 50% risk that political instability and adverse government policy could disrupt your operations in India which would lower your yearly profits by 75% (new line in India option). Also, you learn India might increase tariffs on the USA by 50%.The chance of it happening is 50%.It would decrease profits by 25% (pertains to export option). With this new information, what option should you do?
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