Capital Budgeting Case
The Gillette Company is a globally company which focuses in male grooming products. In order to maintain Gillette Company’s market leadership, the company recently has introduced Excel and MACH3 these two new products into the market. Compared the analysis of income statements of Excel and the combination of MACH3 and Excel, we found out that the Gillette Company should go forward with the development of the MACH3 shaving system because we found the net present value of the combination of MACH3 and Excel is higher than the net present value of Excel system.
Through the information, we found out that the sales of MACH3 during 2009~2014. “Gillette’s sales of the Excel line are expected to reach $1 billion per year by 2007 and to stabilize at that figure. However, the introduction of the MACH3 is expected to replace 8% of Excel’s sales”. Hence, we knew that the revenue of Excel is 92million [(1-8%)*1billion] in the ...view middle of the document...
After we looked through the profit, then we need to record the cash flow. It is the value of add up the depreciation and net profit. Thus, the total cash flow comes up with the values calculated from the front parts. Despite that, the discount rate is 0.077 which is quite important so the final discounted cash flow is being calculated with the formula ( =total cash flow* discount rate). The net present value is 225,428,896 dollars.
Next, the product connected from above is the excel product. From the excel tables, the revenue is 1 billion for each year and expenses is 750 million each year. The pretax profit is equals to revenue minus expense. Because of the 35% tax, we can found out profit after tax(Pretax Profit * 35%). Cash flow = Net profit + Depreciation. Then we can find that discounted cash flow each year (Cash flow * Discount factor). Finally, we got the net present value, which is 75,075,000.
From all the above, we can found out that the net present value of MACH3 and Excel system is higher than the net present value of Excel. Therefor we can come up with the conclusion that the development of the MACH3 shaving system is necessary.
In addition to thinking about and compare the net present value of these two systems, there still exists some other non-quantitative factors should be considered in decision-making. Firstly, since MACH3 has three blazes, which can make the product be felt more comfortable and closer to people’s faces. Secondly, this new product is improved and become safer. This is a very important element of a shaving product, so it can be a good point for customer to choose. Thirdly, this new product is easier to rinsing, this is a big improvement for the shaving product, so it can let the customers to use it more convenient. All in all, the MACH3 concept statement has been carefully developed to maximize consumer communication, product uniqueness and credibility, while minimizing confusion and skepticism. Therefor Gillette should go forward with the development of the MACH3 shaving system because it can help the company gain more profit and have a greater market share. It is a useful way to maintain its position as a flagship in this industry.