Assignment 1: Direct Cash Flow Analysis

As an analyst in Operations Finance, your manager has asked you to create an Excel model with a direct cash flow forecast for the next generation Car using the information below. Prepare yourself to walk your interviewer through your Excel model and calculations.

Assumptions: For simplicity, assume all cash flows occur at year end and there are no working capital requirements.

1.

Development cycle (design and engineering of the vehicle before going to market)

• 5 year development cycle

• Investment in manufacturing equipment and tooling: $450M

a. Investment Timing (15% of the total spend in 2010, 20% in 2011, 20% in 2012, 20% in 2013 and 25% in 2014):

Engineering budget: $390M (timing same as investment spend) 2. Sales

• Assume product is launched the year right after the end of the development cycle

• Life cycle of the product: 5 years of sales after vehicle is launched

• Total market for full-size sedans in the U.S.: 600K units a year

• Expected market share: 18%

• Two different trims are planned for the product:

  • Standard: 65% of total sales; selling price (MSRP) of $27,000 with a 4-cylinder engine (27 MPG fuel

    economy)

  • Luxury: MSRP of $37,000 with a 6-cylinder engine (16 MPG fuel economy)

• GMs revenue per vehicle is after 10% dealer discount from MSRP which dealers typically receive on every sale

• The pricing unit is planning to reduce the price of the vehicle by 2% per year as the new generation of Car matures in the marketplace

3. Variable costs

   • Material costs

     • Standard: $16,000 per vehicle

     • Luxury: $19,000 per vehicle

   • Logistics and Warranty cost (includes freight in and out of the plant and to the dealer lot as well as

     warranty expenses): additional $1,500 average per car

   • Manufacturing cost per unit is calculated at $4,500 per unit, irrespective of the model manufactured

   • Assume 3% reduction in material, logistics, and manufacturing cost per year over the lifecycle of the car

     as the supplier base becomes more efficient and raw material and manufacturing costs are optimized

4. Other costs

Total advertising and marketing budget for the car is $150M in the first year of launch, $75M in each of years 2 to 4, and $125M in year 5

Assignment 2: Recommendation

Based on the projections you derive in Assignment 1, make a recommendation on whether or not to proceed with this discrete product program, the launch of the new generation Car.

As part of your recommendation, calculate the projects NPV (using 15% discount rate). In addition to the projections derived in Assignment 1 and the NPV analysis, make sure to use additional analytical and/or qualitative arguments to support your position.