The full detail of the question has been attached, please show me the answer step by step, thanks.

1. Given the unit sales information in Exhibit 1, develop an annual revenue forecast for 2004 through 2009. Forecast sales first assuming that the revised Bernoulli will be introduced one year from today, and then create a forecast which is based on sales of the current model, assuming that Working declines to invest more capital in Bernoulli.

2. Use the cost information Jennifer has assembled to construct a forecast of cost of goods sold and operating expenses for 2004 through 2009. Assume first that the Bernoulli will be introduced, with its new cost structure, one year from now, and then calculate a cost forecast assuming that the $18 million is not provided for development of the new product.

3. Using the information developed for Questions 1 and 2, develop a discounted cash flow analysis for the Bernoulli division for 2004 through 2009. Working's board has asked for net present value, profitability and the internal rate of return when making decisions in the past. Complete your analysis assuming that the additional investment is contributed today. Be sure to recognise a terminal value for the division at the end of 2009.

4. Make a recommendation as to whether or not Working Computers should contribute the requested $18 million to the Bernoulli. Be sure to recognise/discuss all aspects of the decision, including the potential impact that the requested ongoing investment dollars could have on the plans of Stewart Workman.

5. Jennifer expects Stewart Workman to ask about selling the Bernoulli division. What price should Working ask for if it sells Bernoulli today, immediately after making the requested investment? What price could it expect to receive if it plans to leave Bernoulli alone?

6. In addition to the issues in Question 1 through 5, what other considerations might be appropriate when a firm is considering eliminating a product line or divesting a division?

WORKING COMPUTERS, INC.

Jennifer Sobey, an analyst in the headquarters of Working Computers, has

been asked to evaluate whether or not Working should sell a division of

the firm which has been losing market share and requires a great deal of

new investment to remain competitive. The ailing product is a personal

data appliance, or PDA, that once led the market in features and

innovation, only to fall prey to competition from numerous firms once it

had paved the way for the product category. Complicating Jenniferâs

analysis and recommendation are several political issues involving the

wayward division. In particular, Workingâs recently returned CEO,

Stewart Workman, has decided that the product (the Bernoulli device) is

a âloserâ and has plans to use the capital currently committed to

Bernoulli to boost the ailing performance of other parts of the firm.

.

JUST THE FACTS

Jennifer had discretely gathered a great deal of information from the

Bernoulli unit as well as several of its competitors. In addition, she

had spent the greater part of a week downloading information from the

Internet, mainly opinions of the PDA market and the strengths and

weaknesses of Bernoulli as an ongoing platform.

Jennifer thought that Bernoulliâs declining market share was

troublesome. In 2003, Bernoulli unit sales had represented approximately

fifteen percent of the market, with the largest competitor grabbing a

full 42 percent of unit sales. Unfortunately, market share had been

declining at least one percent each quarter, and there was fear that it

would drop even more. This drop was likely due to a large competitorâs

recent announcement that compatibility with its platform, and not the

Bernoulli, would be incorporated into a popular line of office software

that was unavailable for Working Computers.

The folks in the Bernoulli labs were currently working on major upgrades

to the Bernoulli device as well as the Bernoulli interface software;

these improvements would make Bernoulli compatible with almost every

personal computer on the market. To continue this research, the

Bernoulli division estimated that it would need no less than $18 million

in the next month in order to finish the development of the more advance

product. Allocating this investment within the division was the

responsibility of the divisionâs operating officer, and Jennifer was

confident that the money would be put to good use. When the new products

became available in late 2004, it was likely that Bernoulli could regain

as much as 8 percent of the market within the first year, with gains of

four percent per year after that. Nonetheless, in recent meetings,

Stewart Workman had criticised the $18 million request as being

âinsane,â stating that he knew of several places in the company

where those funds could âearn at least our normal cost of capital for

the shareholders.â The firm had enough cash available for this type of

investment, but Jennifer reasoned that Workman was taking the allocation

of that money personally. Jennifer had forecasted unit sales for the

periods 2004 through 2009 (Exhibit 1), and she had calculated demand

both with and without the additional market share that the new product

was expected to generate.

Exhibit 1.

Working Computers

Unit Sales Projections

Periods ending December 31, 2003 through December 21, 2009

(units, in thousands)

Â 12/31/03 12/31/04 12/31/05 12/31/06 12/31/07 12/31/08 12/31/09

Units Sold, with new investment 180,000 150,000 189,000 246,000 264,000

264,000 264,000

Units Sold, without new investment 180,000 150,000 102,000 57,000

48,000 48,000 48,000

Currently, the Bernoulli division operated with a cost of goods sold of

approximately sixty percent of the unit price and operating expenses

(excluding depreciation) averaging 24 percent of total revenues. The

division expected to sell a total of 300,000 units by the end of 2003 at

a price of $495 each. The model expected to ship beginning in late 2004

would sell at the same price point. The divisionâs managers estimated,

though, that the revised Bernoulli would have cost of goods sold of 54

percent of the retail price with higher operating expenses of 26 percent

due to increased advertising. Given the competitive nature of the

industry, these price point and cost estimates are expected to remain

the same for the next several years.

For strategic planning purposes, Workingâs management allocated

depreciation to the existing Bernoulli division as though the entire

division was an asset and depreciated it using the straight line method

over 10 years, with five years of operation behind it. The initial

investment of $56 million had been made in early 1999. The new funds

allocated to the division would be treated similarly, except that

management had decided that any new investment would be depreciated

using the straight line method over 5 years; due to changes in the

industry since 1999, this was expected to be more consistent with the

nature of the market for computing devices and PDAs. Workingâs

managers used a weighted average cost of capital, or hurdle rate, of

14.5 percent when evaluating capital budgeting projects, and Jennifer

felt that this would be an appropriate discount rate in this instance as

well. The firmâs marginal tax rate, for planning purposes, was 34

percent.

Finally, Jennifer had to consider the fact that the company always held

the option to sell the Bernoulli division to an existing competitor. In

fact, there were rumours on the Internet that several quiet and

unofficial offers had already been discussed with the members of the

board of directors. In developing her analysis, Jennifer would have to

come up with an estimate of a price for the decision, based on the sales

and market share expectations she had gathered. To establish a terminal

value in the final forecast year, 2009, she would capitalise the cash

flows in that year by dividing them by Workingâs overall cost of

capital, essentially treating that yearâs cash flow as the payment

from a perpetuity. In the event that management declined to invest the

requested $18 million today, the Bernoulli division could still maintain

some level of sales for several years, and the patents held by the

division would be worth selling or licensing as well.

For her previous presentations to senior management, Jennifer had

produced detailed discounted cast flow analyses accompanied by documents

to support her assumptions. In addition, she usually spent some time

developing sensitivity analyses using any number that she expected to be

questioned by the board. This time, her main fear was that her

understanding of the growth in market share, because of the revised

Bernoulli due in late 2004, would turn out to be optimistic.

After reviewing her notes, Jennifer grabbed her gym bag and headed off

to the fitness centre in the next building. She anticipated having a

long night ahead of her, and a jog and a shower was just the thing to

clear her head and help her focus. Once in the lobby of her building,

she passed under several hanging banners promoting the companyâs

newest products, bearing slogans such as âImagine Workingâ and

âWeâre Working for You.â Another read âWeâre Always Workingâ

in the corporationâs trademarked font. Reading this banner, Jennifer

slowed and said to herself, âIsnât that the truth.â

REQUIRED

Answer the questions below, showing all workings. Note that some

workings may appropriately be placed in appendices. Detailed and careful

analysis and discussion of any issues involved should be included,

supported by references.

1. Given the unit sales information in Exhibit 1, develop an annual

revenue forecast for 2004 through 2009. Forecast sales first assuming

that the revised Bernoulli will be introduced one year from today, and

then create a forecast which is based on sales of the current model,

assuming that Working declines to invest more capital in Bernoulli.

2. Use the cost information Jennifer has assembled to construct a

forecast of cost of goods sold and operating expenses for 2004 through

2009. Assume first that the Bernoulli will be introduced, with its new

cost structure, one year from now, and then calculate a cost forecast

assuming that the $18 million is not provided for development of the new

product.

3. Using the information developed for Questions 1 and 2, develop a

discounted cash flow analysis for the Bernoulli division for 2004

through 2009. Workingâs board has asked for net present value,

profitability and the internal rate of return when making decisions in

the past. Complete your analysis assuming that the additional investment

is contributed today. Be sure to recognise a terminal value for the

division at the end of 2009.

4. Make a recommendation as to whether or not Working Computers should

contribute the requested $18 million to the Bernoulli. Be sure to

recognise/discuss all aspects of the decision, including the potential

impact that the requested ongoing investment dollars could have on the

plans of Stewart Workman.

5. Jennifer expects Stewart Workman to ask about selling the Bernoulli

division. What price should Working ask for if it sells Bernoulli today,

immediately after making the requested investment? What price could it

expect to receive if it plans to leave Bernoulli alone?

6. In addition to the issues in Question 1 through 5, what other

considerations might be appropriate when a firm is considering

eliminating a product line or divesting a division?

1. Given the unit sales information in Exhibit 1, develop an annual revenue forecast for 2004 through 2009. Forecast sales first assuming that the revised Bernoulli will be introduced one year from today, and then create a forecast which is based on sales of the current model, assuming that Working declines to invest more capital in Bernoulli.

2. Use the cost information Jennifer has assembled to construct a forecast of cost of goods sold and operating expenses for 2004 through 2009. Assume first that the Bernoulli will be introduced, with its new cost structure, one year from now, and then calculate a cost forecast assuming that the $18 million is not provided for development of the new product.

3. Using the information developed for Questions 1 and 2, develop a discounted cash flow analysis for the Bernoulli division for 2004 through 2009. Working's board has asked for net present value, profitability and the internal rate of return when making decisions in the past. Complete your analysis assuming that the additional investment is contributed today. Be sure to recognise a terminal value for the division at the end of 2009.

4. Make a recommendation as to whether or not Working Computers should contribute the requested $18 million to the Bernoulli. Be sure to recognise/discuss all aspects of the decision, including the potential impact that the requested ongoing investment dollars could have on the plans of Stewart Workman.

5. Jennifer expects Stewart Workman to ask about selling the Bernoulli division. What price should Working ask for if it sells Bernoulli today, immediately after making the requested investment? What price could it expect to receive if it plans to leave Bernoulli alone?

6. In addition to the issues in Question 1 through 5, what other considerations might be appropriate when a firm is considering eliminating a product line or divesting a division?

WORKING COMPUTERS, INC.

Jennifer Sobey, an analyst in the headquarters of Working Computers, has

been asked to evaluate whether or not Working should sell a division of

the firm which has been losing market share and requires a great deal of

new investment to remain competitive. The ailing product is a personal

data appliance, or PDA, that once led the market in features and

innovation, only to fall prey to competition from numerous firms once it

had paved the way for the product category. Complicating Jenniferâs

analysis and recommendation are several political issues involving the

wayward division. In particular, Workingâs recently returned CEO,

Stewart Workman, has decided that the product (the Bernoulli device) is

a âloserâ and has plans to use the capital currently committed to

Bernoulli to boost the ailing performance of other parts of the firm.

.

JUST THE FACTS

Jennifer had discretely gathered a great deal of information from the

Bernoulli unit as well as several of its competitors. In addition, she

had spent the greater part of a week downloading information from the

Internet, mainly opinions of the PDA market and the strengths and

weaknesses of Bernoulli as an ongoing platform.

Jennifer thought that Bernoulliâs declining market share was

troublesome. In 2003, Bernoulli unit sales had represented approximately

fifteen percent of the market, with the largest competitor grabbing a

full 42 percent of unit sales. Unfortunately, market share had been

declining at least one percent each quarter, and there was fear that it

would drop even more. This drop was likely due to a large competitorâs

recent announcement that compatibility with its platform, and not the

Bernoulli, would be incorporated into a popular line of office software

that was unavailable for Working Computers.

The folks in the Bernoulli labs were currently working on major upgrades

to the Bernoulli device as well as the Bernoulli interface software;

these improvements would make Bernoulli compatible with almost every

personal computer on the market. To continue this research, the

Bernoulli division estimated that it would need no less than $18 million

in the next month in order to finish the development of the more advance

product. Allocating this investment within the division was the

responsibility of the divisionâs operating officer, and Jennifer was

confident that the money would be put to good use. When the new products

became available in late 2004, it was likely that Bernoulli could regain

as much as 8 percent of the market within the first year, with gains of

four percent per year after that. Nonetheless, in recent meetings,

Stewart Workman had criticised the $18 million request as being

âinsane,â stating that he knew of several places in the company

where those funds could âearn at least our normal cost of capital for

the shareholders.â The firm had enough cash available for this type of

investment, but Jennifer reasoned that Workman was taking the allocation

of that money personally. Jennifer had forecasted unit sales for the

periods 2004 through 2009 (Exhibit 1), and she had calculated demand

both with and without the additional market share that the new product

was expected to generate.

Exhibit 1.

Working Computers

Unit Sales Projections

Periods ending December 31, 2003 through December 21, 2009

(units, in thousands)

Â 12/31/03 12/31/04 12/31/05 12/31/06 12/31/07 12/31/08 12/31/09

Units Sold, with new investment 180,000 150,000 189,000 246,000 264,000

264,000 264,000

Units Sold, without new investment 180,000 150,000 102,000 57,000

48,000 48,000 48,000

Currently, the Bernoulli division operated with a cost of goods sold of

approximately sixty percent of the unit price and operating expenses

(excluding depreciation) averaging 24 percent of total revenues. The

division expected to sell a total of 300,000 units by the end of 2003 at

a price of $495 each. The model expected to ship beginning in late 2004

would sell at the same price point. The divisionâs managers estimated,

though, that the revised Bernoulli would have cost of goods sold of 54

percent of the retail price with higher operating expenses of 26 percent

due to increased advertising. Given the competitive nature of the

industry, these price point and cost estimates are expected to remain

the same for the next several years.

For strategic planning purposes, Workingâs management allocated

depreciation to the existing Bernoulli division as though the entire

division was an asset and depreciated it using the straight line method

over 10 years, with five years of operation behind it. The initial

investment of $56 million had been made in early 1999. The new funds

allocated to the division would be treated similarly, except that

management had decided that any new investment would be depreciated

using the straight line method over 5 years; due to changes in the

industry since 1999, this was expected to be more consistent with the

nature of the market for computing devices and PDAs. Workingâs

managers used a weighted average cost of capital, or hurdle rate, of

14.5 percent when evaluating capital budgeting projects, and Jennifer

felt that this would be an appropriate discount rate in this instance as

well. The firmâs marginal tax rate, for planning purposes, was 34

percent.

Finally, Jennifer had to consider the fact that the company always held

the option to sell the Bernoulli division to an existing competitor. In

fact, there were rumours on the Internet that several quiet and

unofficial offers had already been discussed with the members of the

board of directors. In developing her analysis, Jennifer would have to

come up with an estimate of a price for the decision, based on the sales

and market share expectations she had gathered. To establish a terminal

value in the final forecast year, 2009, she would capitalise the cash

flows in that year by dividing them by Workingâs overall cost of

capital, essentially treating that yearâs cash flow as the payment

from a perpetuity. In the event that management declined to invest the

requested $18 million today, the Bernoulli division could still maintain

some level of sales for several years, and the patents held by the

division would be worth selling or licensing as well.

For her previous presentations to senior management, Jennifer had

produced detailed discounted cast flow analyses accompanied by documents

to support her assumptions. In addition, she usually spent some time

developing sensitivity analyses using any number that she expected to be

questioned by the board. This time, her main fear was that her

understanding of the growth in market share, because of the revised

Bernoulli due in late 2004, would turn out to be optimistic.

After reviewing her notes, Jennifer grabbed her gym bag and headed off

to the fitness centre in the next building. She anticipated having a

long night ahead of her, and a jog and a shower was just the thing to

clear her head and help her focus. Once in the lobby of her building,

she passed under several hanging banners promoting the companyâs

newest products, bearing slogans such as âImagine Workingâ and

âWeâre Working for You.â Another read âWeâre Always Workingâ

in the corporationâs trademarked font. Reading this banner, Jennifer

slowed and said to herself, âIsnât that the truth.â

REQUIRED

Answer the questions below, showing all workings. Note that some

workings may appropriately be placed in appendices. Detailed and careful

analysis and discussion of any issues involved should be included,

supported by references.

1. Given the unit sales information in Exhibit 1, develop an annual

revenue forecast for 2004 through 2009. Forecast sales first assuming

that the revised Bernoulli will be introduced one year from today, and

then create a forecast which is based on sales of the current model,

assuming that Working declines to invest more capital in Bernoulli.

2. Use the cost information Jennifer has assembled to construct a

forecast of cost of goods sold and operating expenses for 2004 through

2009. Assume first that the Bernoulli will be introduced, with its new

cost structure, one year from now, and then calculate a cost forecast

assuming that the $18 million is not provided for development of the new

product.

3. Using the information developed for Questions 1 and 2, develop a

discounted cash flow analysis for the Bernoulli division for 2004

through 2009. Workingâs board has asked for net present value,

profitability and the internal rate of return when making decisions in

the past. Complete your analysis assuming that the additional investment

is contributed today. Be sure to recognise a terminal value for the

division at the end of 2009.

4. Make a recommendation as to whether or not Working Computers should

contribute the requested $18 million to the Bernoulli. Be sure to

recognise/discuss all aspects of the decision, including the potential

impact that the requested ongoing investment dollars could have on the

plans of Stewart Workman.

5. Jennifer expects Stewart Workman to ask about selling the Bernoulli

division. What price should Working ask for if it sells Bernoulli today,

immediately after making the requested investment? What price could it

expect to receive if it plans to leave Bernoulli alone?

6. In addition to the issues in Question 1 through 5, what other

considerations might be appropriate when a firm is considering

eliminating a product line or divesting a division?

## This question was asked on Apr 25, 2010.

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