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BUSI 408 - Tar Heel Electronics(1)

BUSI 408 - Tar Heel Electronics(1) - BUSI408 Fall 2011...

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BUSI408 – Fall 2011 CAPITAL BUDGETING / FINANCIAL ANALYSIS TAR HEEL ELECTRONICS David Pillar, CFO of Tar Heel Electronics , wondered which business decision would best serve Tar Heel’s investors. Tar Heel supplied key electronic components to PC, cell-phone, and other mobile device manufacturers. Strong demand for its new generation technology had outpaced the company’s ability to supply the components, and over the last several months, a 4-month backlog of orders had developed. Not wanting to lose customers due to slow delivery, the company had already decided to increase its manufacturing and supply capabilities in this area. The current round of discussions among management dealt with whether Tar Heel should increase capabilities by increasing in-house production or by outsourcing . Some managers insisted that the firm should spend the money to expand both its capabilities and employee pool, while others felt outsourcing would be the better option given how quickly new technology sometimes becomes outdated. Mr. Pillar had been collecting information from these discussions, and now felt that he had the important information to make the decision. His notes included the following information: - Integration Test : Tar Heel had just completed a $3million integrated test phase with the major PC and mobile device companies to ensure the new technology worked with existing platform limitations. - Demand Study : Tar Heel had recently spent $400,000 in a market study that suggested demand would be good over the next 6 years before new technology was expected to make this current technology obsolete. Based on the study, the firm expected to receive the following orders from Y2012-Y2016.
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