Estimating EBIAT, NOA, and Growth Rates

To simplify our analysis of the strategic decisions facing GenapSys, we have made some assumptions and calculated approximate EBIAT and NOA ratios for each strategy. Because the data analytics strategy will require an initial period to build up the install base, we have modeled years $1-5$ separately from years $6+.$ We have also made our own estimate of the growth rates that will result from each strategy. If you wish, you may change any of the cells shaded in yellow below. You may want to answer questions $1$ and $2$ below before making your own changes to the model. To reset the model to initial assumptions, use the reset button below or look for the initial values in the comment field of each cell.

Click here to see the Assumptions tab for detailed information on how we constructed our analysis.

Traditional Strategy Razor and Razor Blades Strategy Data Analytics Strategy $-$ years $1-5$ Data Analytics Strategy $-$ years $6+$

Machine Test Total Machine Test Total Machine Test Data Total Machine Test Data Total

Sales Mix $50\%50\%100\%30\%70\%100\%24\%56\%20\%100\%9\%21\%70\%100\%$

Unit Revenue $40,0007506,0002003,000753,00075$

Unit Cost $3,000753,000753,000753,00075$

Gross Margin $92\mathrm{.}5\%90\mathrm{.}0\%91\mathrm{.}3\%50\mathrm{.}0\%62\mathrm{.}5\%58\mathrm{.}8\%0\mathrm{.}0\%0\mathrm{.}0\%95\mathrm{.}0\%19\mathrm{.}0\%0\mathrm{.}0\%0\mathrm{.}0\%95\mathrm{.}0\%66\mathrm{.}5\%$

Operating Costs $30\mathrm{.}0\%30\mathrm{.}0\%35\mathrm{.}0\%35\mathrm{.}0\%$

EBIT $/$ Sales $61\mathrm{.}3\%28\mathrm{.}8\%-16\mathrm{.}0\%31\mathrm{.}5\%$

Tax Rate $30\mathrm{.}0\%30\mathrm{.}0\%0\mathrm{.}0\%30\mathrm{.}0\%$

EBIAT $/$ Sales $42\mathrm{.}9\%20\mathrm{.}1\%-16\mathrm{.}0\%22\mathrm{.}1\%$

Wkg Cap $15\mathrm{.}0\%30\mathrm{.}0\%50\mathrm{.}0\%50\mathrm{.}0\%0\mathrm{.}0\%40\mathrm{.}0\%50\mathrm{.}0\%50\mathrm{.}0\%0\mathrm{.}0\%15\mathrm{.}0\%$

Fixed Assets $3\mathrm{.}8\%5\mathrm{.}0\%4\mathrm{.}4\%25\mathrm{.}0\%18\mathrm{.}8\%20\mathrm{.}6\%50\mathrm{.}0\%50\mathrm{.}0\%0\mathrm{.}0\%40\mathrm{.}0\%50\mathrm{.}0\%50\mathrm{.}0\%0\mathrm{.}0\%15\mathrm{.}0\%$

NOA $/$ Sales $19\mathrm{.}4\%50\mathrm{.}6\%80\mathrm{.}0\%30\mathrm{.}0\%$

Estimated Growth Rates

Years $1-510\%60\%80\%$

Years $6-105\%30\%50\%$

Cumulative Free Cash Flow Curves

In addition to the Net Operating Assets calculated above, we'll assume for this exercise that the three strategies require capital expenditures of $$10$ million, $$10$ million, and $$20$ million, which reflect all the costs of developing the systems necessary to complete the product and data services.

We will also assume first year revenue of $$8$ million for the traditional strategy, and $$4$ million for the other two strategies.

Finally, based on their increasing levels of risk, we have assumed discount rates of $12\%,15\%,$ and $20\%$ as shown below.

Traditional Razor and Razor Blades Data Analytics Strategy

Additional Startup Capex $10,00010,00020,000$

First Year Revenue Estimate $8,0004,0004,000$

Discount Rate $12\mathrm{.}0\%15\mathrm{.}0\%20\mathrm{.}0\%$

$1.$ Based on the three variables $($growth$,$ EBIAT margin, NOA$/$Sales$)$ computed above for each strategy, as well as the startup capex and revenue assumptions made above, draw a rough approximation of each cumulative cash flow curve will look like. do not need to do this in excel $-$ please simply draw three curves on paper with some attention to how they will differ. may want to print this page and draw them on the blank Cumulative FCF curves below.

$2.$ Consider the cash flow curves you have drawn above. What key differences are there between the cash flow curves of each strategy? What type of investor might each strategy attract?Estimating EBIAT, NOA, and Growth Rates

To simplify our analysis of the strategic decisions facing GenapSys, we have made some assumptions and calculated approximate EBIAT and NOA ratios for each strategy. Because the data analytics strategy will require an initial period to build up the install base, we have modeled years $1-5$ separately from years $6+.$ We have also made our