BioCom, Inc.: Part 2, Evaluating a New Product Line This mini-case is avalable BioCom, Inc, is weighing a proposal to manufacture and market a fiber-optic device that will continuously monitor blood pressure during cardiovascular surgery and other medical procedures in which precise, real-time measurements are critical. The device will continuously transmit information to a computer via a thin fiber-optic cable and display measurements on several large monitors in view of operating room personnel. It will also store the data and display it graphically for review during or after procedures. BioCom will market various versions of the device, but manufacture all of them in the same facility using the same equipment. The versions will have similar markups and cost structures. If management decides to bring this device to market, BioCom will stop selling an earlier, less sophisticated version of the monitor. The product that BioCom will discontinue now contributes about $1,650,000 per year to operating cash flow, and projected sales are flat. BioCom focuses exclusively on cutting-edge applications, so it expects to discontinue the new monitor after five years. At that time, it will sell the technology and used manufacturing equipment to a Questions foreign company for an estimated \$2,400,000. 1. What is the total relevant initial investment for Cost analysts have collected the following figures BioCom's new product line? Would you include and submitted them to the treasurer's office for addithe designs and prototypes? Would you include tional study and a final decision on whether to proceed. the change in net working capital? You, as assistant to the treasurer, must compute and 2. What is the cash flow resulting from disposal of evaluate the basic capital budgeting criteria. The proithe equipment at the end of the project? product that BioCom will discontinue now contributes about \$1,650,000 per year to operating cash flow, and projected sales are flat. BioCom focuses exclusively on cutting-edge applications, so it expects to discontinue the new monitor after five years. At that time, it will sell the technology and used manufacturing equipment to a Questions foreign company for an estimated $2,400,000. 1. What is the total relevant initial investment for Cost analysts have collected the following figures BioCom's new product line? Would you include and submitted them to the treasurer's office for addithe designs and prototypes? Would you include tional study and a final decision on whether to proceed. the change in net working capital? You, as assistant to the treasurer, must compute and 2. What is the cash flow resulting from disposal of evaluate the basic capital budgeting criteria. The projthe equipment at the end of the project? ect will initially increase working capital by $480,000, 3. Compute a schedule of depreciation for the plant which the company will recover at the end of the project and equipment. when it sells remaining inventory and collects accounts 4. Compute a schedule of operating cash flows for receivable. The analysts are not quite sure if they should BioCom's new product. include $450.000 that the company already spent on re- 5. Compute a schedule of incremental cash flows for search and development for the new product. They also BioCom's new product. disagree about whether the effect of the discontinued monitor on the company's overall operating cash flows is 6. Compute the project's net present value. relevant to the decision on the new product line, so you 7. Does your answer to Question 6 indicate that manmust decide how to deal with these two items. agement should accept or reject the product? 8. Challenge question. Use a spreadsheet for this question. a. Recompute your answers to Questions 4 through 7 assuming sales grow at 12% per year. b. Recompute your answers to Questions 4 through 7 assuming sales grow at 0% per year. c. Comment on the sensitivity of the NPV to the growth rate of sales
