Corp_Ch12_09

Corp_Ch12_09 - Marvin Enterprises: 1. No expansion 2....

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Unformatted text preview: Marvin Enterprises: 1. No expansion 2. Expansion WEEK III Preparation for EcsyCola: Data Price of zero NPV (lower price=>scrap) World Demand Marginal Revenu salvage+(pricecost)/r=0 Q = 80080*price Linear demand (price as function of quantity World Capacity Price = salvage*r+cost P = a bQ = 10 Q/80 Gen 1 6.00 120.00 Revenue: R = Q*P = Q*(abQ) = aQ bQ^2 Marginal revenue: MR = a 2bQ = 10 Q/ Gen 2 4 144.00 Gen3 3.5 0.00 Supply Derived demand Marginal Revenue Total demand (blue) shows the equation Price Total Demand Competitors Marvin Marvin Competitor supply (red) is fixed in variou 10.00 0 240 0 0 Based on the price for NPV=0. For price 9.75 20 240 0 0 Gen 1 disappears at p=6, and Gen 2 atb 9.50 40 240 0 0 9.25 60 240 0 0 Marvin's derived demand (black) equals 9.00 80 240 0 0 Marginal revenue (green) is calculated fr 8.75 100 240 0 0 MR = [Q*P for the next (lower) price Q* 8.50 120 240 0 0 For prices avove 7, derived deman is zer 8.25 140 240 0 0 MR jumps every time competitors leave. 8.00 160 240 0 0 7.75 180 240 0 0 Marginal cost of Gen 2 is 3.5. 7.50 200 240 0 0 MR is greater than cost for p=6.7, when 7.25 220 240 0 0 Therefore, Marvin will operate all the 24 7.00 240 240 0 7 This is the starting point for consideratio 6.9999 240.01 240 0.01 6.75 6.75 260 240 20 6.25 A note on graph: in the derived demand 6.7 264 240 24 5.95 takes a line from the last point before the 6.50 280 240 40 5.75 extensive work it takes to fix it isn't justifi Relevant cur 6.25 300 240 60 5.25 6.00 320 240 80 6 11.00 5.9999 320.01 120 200.01 3.25 5.75 340 120 220 2.75 5.50 360 120 240 2.25 9.00 5.25 380 120 260 1.75 5.00 400 120 280 1.25 4.75 420 120 300 0.75 7.00 4.50 440 120 320 0.25 4.25 460 120 340 0.25 4.00 480 120 360 4 5.00 3.9999 480.01 0 480.01 2.25 3.75 500 0 500 2.75 3.50 520 0 520 3.25 3.00 3.25 540 0 540 3.75 3.00 560 0 560 4.25 1.00 2.75 580 0 580 4.75 2.5 600 0 600 5.25 2.25 620 0 620 5.75 1.00 2 640 0 640 6.25 1.75 660 0 660 6.75 1.5 680 0 680 7.25 3.00 1.25 700 0 700 7.75 1 720 0 720 8.25 0.75 740 0 740 8.75 5.00 0.5 760 0 760 9.25 0 100 0.25 780 0 780 9.75 Price and MR 3.00 5.00 0.00 800 0 800 NA 0 100 (price as function of quantity): Q*P = Q*(abQ) = aQ bQ^2 ue: MR = a 2bQ = 10 Q/40 nd (blue) shows the equation in cell D2 supply (red) is fixed in various ranges. he price for NPV=0. For price in the range of 610 competitor supply is fixed at 240. ppears at p=6, and Gen 2 atb p=4, supply drops to 120. It goes to zero at p=4. rived demand (black) equals total demand minus competitor supply. venue (green) is calculated from the graph by: for the next (lower) price Q*P for current price]/change in Q. avove 7, derived deman is zero, and so is MR. every time competitors leave. ost of Gen 2 is 3.5. er than cost for p=6.7, when Marvin sells all its 24 units of Gen 2. Marvin will operate all the 24 units and total demand wil be 240+24 = 264. starting point for consideration of expansion. raph: in the derived demand curve, the lines that should be vertical, are not exact. The graph from the last point before the jump, to the next one. The graph could be improved, but the work it takes to fix it isn't justified here. Relevant curves to determine Marvin's price with no expansion 00 00 Column A Column A Column A Column E 00 00 00 00 00 00 00 0 100 200 300 400 Quantity 500 600 700 800 00 00 0 100 200 300 400 Quantity 500 600 700 800 Price of zero NPV of an existing plan Generation gen1 Gen2 Gen3 Price = salvage*r+cost 6.00 4 3.5 World Demand=Capacity Price of zero NPV of a new plan investment+( price = investment*r+cost Price = not relevant not relevant [ price = (800D)/80 ] 320.00 480.00 520.00 salvage+(pricecost)/r=0 D = 80080*price Calcualtions for 20272031 Possible new capacity of gen3 and existing capacity of gen2 and gen1 Marvin Gen 3 cap (NEW) 50 75 100 125 150 Gen 2 cap 24 24 24 24 24 Competition Gen 1 120 120 120 120 120 Gen 2 120 120 120 120 120 Obtaining final price World cap 314 339 364 389 414 Max cap at $6/unit 320 320 320 320 320 Capacity to be scrapped 0 19 44 69 94 Capacity scrapped (gen 1) 0 19 44 69 94 World capacity 314 320 320 320 320 Price final 6.08 6 6 6 6 Marvin's market share 0.24 0.31 0.39 0.47 0.54 Note: If Marvin were to build capacity of 275, part of gen2 capacity would be withdrawn. Assumption will have to be made wh or competitors will widraw this capcacity. This would beging to happen if Marvin were to build capcity of 256 million units (400 Calcualtions for 2032 Note: An operating unit of gen2 should not be scraped to replace with a unit of gen3 at any price. To see why, check the ineq NPV of scrapping the gen2 unit and building a gen3 unit = 2.510+(price3)/0.2 < NPV of operating the gen2 unit = (price3.5 Therefore, gen2 will remain in the market unless price falls to 4.75 or less. Since NPV is positive when building a new gen3 unit as long as price is above 5, it is expected that existing gen2 will remain in However, at $5 all gen1 capacity wil be scrapped. Remaining capacity Marvin Gen 3 cap (NEW) 50 75 100 125 150 Gen 2 cap 24 24 24 24 24 Competition gen2 120 120 120 120 120 Total 194 219 244 269 294 Demand at price = 5 400 400 400 400 400 New capacity of gen3 206 181 156 131 106 Marvin's market share 0.19 0.25 0.31 0.37 0.44 Note: It is assumed new capcity will be built by competitors NPV Calculations Marvin's NPV/noexpansion 20272031 2032+ World capacity 264 400 Price 6.7 5 (Note: the text says current price=$7. But with capacity a Marvin's CF 76.8 36 Total PV PV $229.68 $72.34 $302.02 Existing plant/expansion Gen 3 cap 50 75 100 125 150 Price 20272031 CF PV Price 2032+ CF PV Total PV of existing plant (loss from expansion) Expansion CF 20272031 PV CF 2032+ PV Investment NPV(expansion, exc.loss) NPV (net of loss) 6.08 61.8 $184.82 5 36 $72.34 $257.16 $44.86 153.75 $459.81 100 $200.94 500 $160.75 $115.89 6 60 $179.44 5 36 $72.34 $251.77 $50.24 225 $672.89 150 $301.41 750 $224.30 $174.05 6 60 $179.44 5 36 $72.34 $251.77 $50.24 300 $897.18 200 $401.88 1000 $299.06 $248.82 6 60 $179.44 5 36 $72.34 $251.77 $50.24 375 $1,121.48 250 $502.35 1250 $373.83 $323.58 6 60 $179.44 5 36 $72.34 $251.77 $50.24 450 $1,345.78 300 $602.82 1500 $448.59 $398.35 Note a quarke in the function "npv" of excel: It assumes the first CF in the series is t=1. Therefore to use the function take CF Series for graphs: Expansion 0 50 75 100 125 150 175 200 225 250 275 NPV (gross) 0 161 224 299 374 449 523 419 261 56 327 NPV(net) 0 116 174 249 324 398 473 347 167 61 477 NPV from expans Column C Column D 600 400 NPV ($, millions) 200 0 200 400 600 0 50 100 150 New Capacity (unit, m Price of zero NPV of a new plant 5 Demand = 400 investment+(pricecost)/r=0 rice = investment*r+cost 175 24 120 120 200 24 120 120 225 24 120 120 250 24 120 120 514 320 194 120 394 5.08 0.70 275 24 120 120 539 320 219 120 419 4.76 0.71 439 464 489 320 320 320 119 144 169 119 120 120 320 344 369 6 5.7 5.39 0.62 0.65 0.67 . Assumption will have to be made whether Marvin o build capcity of 256 million units (40012024) and up. any price. To see why, check the inequality: of operating the gen2 unit = (price3.5)/0.2 pected that existing gen2 will remain in the market 175 24 120 319 400 81 0.50 200 24 120 344 400 56 0.56 225 24 120 369 400 31 0.62 250 24 120 394 400 6 0.69 275 24 120 419 400 4.76 price (new capacity is zero) 0.71 s current price=$7. But with capacity already 264, price will fall to $6.7) 175 200 225 250 275 6 60 $179.44 5 36 $72.34 $251.77 $50.24 5.7 52.8 $157.90 5 36 $72.34 $230.24 $71.77 5.39 45.3 $135.47 5 36 $72.34 $207.81 $94.20 537.19 $1,606.52 450 $904.22 2250 $260.74 $166.54 5.08 37.8 $113.05 5 36 $72.34 $185.38 $116.63 518.75 $1,551.38 500 $1,004.69 2500 $56.07 ($60.56) 4.76 30.3 $90.62 4.76 30.3 $60.88 $151.50 $150.52 484.69 $1,449.51 484.69 $973.93 2750 ($326.56) ($477.08) 525 540 $1,570.07 $1,614.93 350 400 $703.29 $803.76 1750 2000 $523.36 $418.69 $473.11 $346.91 Therefore to use the function take CF(t=1,2,...) and add CF(0) separately NPV from expansion Column C Column D 0 50 100 150 200 250 300 New Capacity (unit, millions) Data Expected values Investment Fixed cost Capacity Variable cost Price Sales Cutoff sales?? Required rate Tax rate Depreciation Millions Rates Years 20 dollars 3 dollars 200 liters Sparky Demand 0.12 dollars/liter in Low 0.65 dollars/liter Out Low 12.5 2008 In High 25 2009 Out High 50 2010+ 20 2010+ Notice that the plant can be operated practically forever. Must include this 0.25 0.3 4 straightline Year Investment Fixed cost Depreication Sales (units) 0 2006 20 3 This is a template for the analysis of EcsyCola's problem. First go through the template to see that you agree with the logic. a solution. Figures constant in nominal terms Scenarios to consider Enter Now Sparky out NPV Sparky in NPV Wait one Year Sparky out NPV IRR Demand High Low IRR IRR Decision if wait at end of year Demand High Low High 0.5 0.85 0.15 Year 1 high Year 1 low 0.5 0.15 0.85 Expectation Low Sparky out Decision Probability assessment (priors) Demand Year 1 Year 2 If deamnd in Year 1 High Low NPV before assessment of Sparky's strategy Enter now Wait one year Sparky out Wait one year Sparky in Sparky out Sparky in Year 2 high Yearl 2 low Assessment of Sparky's Strategy Proposed strategy for Ecsy Cola 1 2007 0 3 5 2 20008 0 3 5 2.5 5 6.25 12.5 3 2009 0 3 5 5 10 12.5 25 4 2010 0 3 5 10 20 25 50 lly forever. Must include this fact in terminal value EcsyCola's problem. that you agree with the logic. Then prepare Sparky in NPV IRR wait at end of year NPV Sparky in Decision NPV ...
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