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The Jacobs Division 2010 Case Solution
| Solution Id | Length | Case Author | Case Publisher |
|---|---|---|---|
| 2808 | 1438 Words (6 Pages) | Robert M. Conroy, Robert Vandell, Diana Harrington | Darden School of Business : UVA-F-0243 |
A Word File
The Jacobs Division of MacFadden Chemical Company has been working on a new project – the Silicone-X project. The product is a special-purpose coating that adds slipperiness to a surface and has a variety of uses in products to reduce friction. As per the demand estimation, the product is likely to have a high customer base. However, there is a possibility that it would result in the competition that would affect its market share and price. Richard Soderberg, the financial analyst for Jacobs, has analyzed the feasibility of the project using two approaches: labor-intensive method and capital-intensive method. The labor-intensive method produces positive net present value at the discount rate of 20% as well as 8%. The capital-intensive method yields a negative net present value at 20%. However, the 8% rate yields a better result. Since the demand for Silicon-X can be estimated accurately, the labor-intensive method seems more feasible; however, if the demand develops in the future, the capital-intensive method would be superior.
Following questions are answered in this case study solution
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Should the Silicone-X project be undertaken? Why/why not?
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You recommend acceptance; how should the necessary plant capacity be provided?
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How should Mr. Soderberg take the alternative prices into account in making his decision about the Silicone - X project?
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From MacFadden's point of view, how do you like Mr. Reynolds's method of analyzing investments at the Jacobs Division?
Case Analysis for The Jacobs Division 2010
1. Should the Silicone-X project be undertaken? Why/why not?
The Silicone-X project should be undertaken because firstly, it generates the positive net present value in the labor-intensive method analysis, with a discount rate of both 12% and 8%, and it produces significantly better results in the capital-intensive method analysis, with a discount rate of 8%. Secondly, the product has a variety of applications, which is why it has been difficult to estimate its demand, but it can be safely said that the product is expected to have many buyers. Based on this expectation, it is also possible that the other firms might engage in developing the very same product, and with the evidence from the already established market and its demand dynamics, they might invest in capital-intensive production, which will give them a competitive advantage over MacFadden in terms of pricing, since they will be able to sell the product at a lower price. MacFadden has an opportunity to capture the market since Jacobs is in the development stage of the product. Thirdly, the project does not seem to have a high level of risk. Considering the labor-intensive method, the project requires an initial outlay of $900,000, with the equipment having an adaptable use and a balance that can be sold for $200,000 and tax-write-offs covering the remaining amount in case the project fails. The real risks of the project seem to be the start-up cost and losses. Considering the capital-intensive method, the project requires an outlay of $3.3 million, which would lead to a reduction in both variable and fixed costs. The $400,000 worth of machinery can also be used in other company's activities, and the balance has a salvage value of $800,000, with the breakeven quantity of Silicone-X reducing to 369,333 pounds as compared to the breakeven quantity of 540,000 pounds in case of labor-intensive method.
Given the financial feasibility, the demand factor, and the risk-return analysis, it is recommended that the Silicone-X project should be undertaken.
2. You recommend acceptance; how should the necessary plant capacity be provided?
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