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Energy Gel: A New Product Introduction (A) Case Solution & Answer

Energy Gel: A New Product Introduction (A) Case Solution

As the company has started from scratch to understand the needs of its beloved customer, in order to introduce new product; it should focus on creating and then retaining its customer for ‘long-term-relation’. By doing so, the company will get all its expenses recovered and its relation with customer would also strengthen.

  1. Increase in Working Capital

As we can see that it has been increasing drastically from 0.9 to 4.8 at the average of 3.4. It is increasing due to the high inventories. We should decrease the inventory by utilizing our demand and we can also invest that money somewhere so that we can have revenue from that additional investment as well.

Projected Cash flow

Particulars 0 1 2 3 4 5 6 7 8 9 10
Details of Operating cash flow:
Net Income (1.60) 1.60 2.70 3.60 4.30 4.80 5.20 5.40 5.70 6.00
Depreciation 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30
Advertising Expense 2.20 3.30 2.70 2.50 2.30 2.50 2.70 3.00 3.20 3.40
R&D Expense 2.50
Inventories 0.40 0.90 1.10 1.30 1.40 1.60 1.70 1.90 1.90 2.00
Working Capital 0.90 2.20 2.60 3.10 3.40 3.80 4.00 4.30 4.50 4.80
Operating cash flow (5.50) (0.10) 1.80 3.20 4.30 4.80 5.10 5.10 5.40 5.70
Details of Capital Expenditure:
Building (1.50)
Machinery and Equipment (2.00)
Fixed Assets (3.50)
Details of Terminal cash flows:
Growth Rate 10.0%
Discount Rate 15.0%
Terminal Value 114.00
Free cash flow (3.50) (5.50) (0.10) 1.80 3.20 4.30 4.80 5.10 5.10 5.40 119.70
NPV @ 15% hurdle rate (3.50) (4.78) (0.08) 1.18 1.83 2.14 2.08 1.92 1.67 1.54 29.59
IRR 41.7%
Mixing machine usage
Particulars 0 1 2 3 4 5 6 7 8 9 10
Full capacity 66.00 66.00 66.00 66.00 66.00 66.00 66.00 66.00 66.00 66.00 66.00
Energy bar sales without 10% erosion (Ex. 4) 39.40 43.30 47.60 51.90 56.10 60.60 65.45 70.68 76.34 82.45 89.04
Growth rate in sales % 9.90 9.93 9.03 8.09 8.02 8.00 8.00 8.00 8.00 8.00
Energy bar sales with 10% erosion 39.40 38.97 42.84 46.71 50.49 54.54 58.90 63.62 68.70 74.20 80.14
Energy bar capacity utilization 0.60 0.59 0.65 0.71 0.77 0.83 0.89 0.96 1.04 1.12 1.21
Unused capacity in terms of bars in millions 26.60 27.03 23.16 19.29 15.51 11.46 7.10 2.38 (2.70) (8.20) (14.14)
Conversion factor of energy bar capacity to gel 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00
Capacity available for energy gel (million units) 53.20 54.06 46.32 38.58 31.02 22.92 14.19 4.77 (5.41) (16.40) (28.27)
Capacity used by energy gel (unis in millions)
Excess capacity 53.20 54.06 46.32 38.58 31.02 22.92 14.19 4.77 (5.41) (16.40) (28.27)

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