1. As operating managers, the GE team working to turn around the business must consider multiple projects and weigh those that make sense for the business to pursue for investment. GE has viewed the Healthcare Business as vital to its long-term business turnaround. In this hypothetical case, the Healthcare unit management team has been evaluating an expansion into a new product line of diagnostic equipment. You are working in a strategic analysis unit reporting to the CFO and responsible for assessing the proposal presented by the unit for investment.

The unit engaged Boston Consulting Group (BCG) last year to assist it in assessing the market opportunity for this specific, high-technology piece of equipment designed to improve the diagnosis of early forms of cancer. The retainer paid to BCG was $250,000 and resulted in a report that forms the basis for many of the components of the proposal before you.

The unit proposes to purchase necessary manufacturing machinery expected to cost $25 million and requiring $5 million in installation and retrofit costs. The plan, as formulated, anticipates utilizing an existing plant of 1,000 square feet that management had planned to sell for $4.5 million. The sale was put on hold when the current proposal was presented to management and the CFO has determined that the best way to recognize this cost for the proposal is to charge the project a rent expense equal to the lease value of the space. Rent is calculated at $25 per square foot per month or $25,000 in rental expense per month.

The Accounting Department has determined that the useful life for the equipment is five years. The practice for evaluating strategic projects established by the CFO is to utilize MACRs depreciation in the analysis phase.

As proposed and based upon the work done with BCG, the team expects the following sales forecast ranges and pricing:

	Sales in Units
Year	Low	High	Most Likely	Expected	Price per Unit
1	900	1,200	1,000	?	$107,500
2	1,000	1,350	1,200	?	$107,500
3	1,250	1,650	1,500	?	$109,100

Based upon scenario analysis, the team believes that there is a 20% probability of the low estimate and a 35% chance that the product will sell at the highest level of expectation. However, as you develop your analysis, it is always a good idea to keep in mind how good or bad things might turn out even though you will focus on the weighted average expected volume.

Only modest price increases are expected late in the planning period given the size of the investment required to purchase the new equipment. These impacts are reflected in the above table.

Working with the Comptroller, the plan anticipates the need for an increase in net working capital of 5% of first years sales at the outset. It is expected that there will be relatively low inventory levels as much of the demand will be contracted sales with a high degree of collection for AR. The expectation is that as sales increase, a marginal increase in net working capital of 4% of next years sales revenue will be needed as NWC investment.

The manufacturing team anticipates a mixture of fixed and variable costs. Given the detail that the team has available about the new equipment, they are confident that the costs will hold for all three of the unit forecasts. Fixed costs are expected to be $47.5 million per year and variable costs are expected to run $65,000 per unit at the outset with an expected 1% productivity reducing costs over the next two years.

The CFO is assuming the companys tax rate will be 10% as the company moves from a loss position to a positive income position, so use that rate here.

The final consideration is that the Healthcare Business unit believes that this new product manufacturing unit could become a valuable asset and could be divested at a significant profit after three years. This would be at the height of its initial market growth. While it is impossible to make any solid prediction today about this, the CFO has requested that the proposal be evaluated as a three-year project under the assumption that the new equipment is sold at the end of year three. The best estimate of its sale value is at least $15 million, so that is the assumption you are to use. The CFO argues that this will provide a conservative estimation of the project value to ensure that the proposal is highly likely to be profitable if pursued.

Given this data, your deliverable for the CFO is an assessment of the viability of this project using the project assessment techniques we have developed in the course. A short memo with your conclusions accompanied by an Excel spreadsheet illustrating your analysis is appropriate.