University of the Philippines Los Baños

College, Laguna

Case Analysis I
HDTV Systems

Submitted by:
Group 2
Caraan, Francis Nikky H.
Castre, Von Anthony
Coloma, Bernice Franchesca A.
Dizon, Sarah Grace B.
Espeso, Carlito Jose III B.

Submitted to:
Prof. Normito R. Zapata Jr.

Submitted on
December 4, 2020
 This case involves both quantitative and qualitative aspects of capital budgeting in a
firm whose principal owner desires growth and new products but finds constraints primarily due
to the size of the company. The case begins with a description of HDTV Systems as a closely held
company with limitations to growth. It presents limitations to funding and shortfalls in analytical
processes. Cash flow estimates for a new consumer television product are presented as well as
the project’s internal rate of return and payback period. The student will learn that capital
budgeting is a complex process going beyond calculations of investment worth.

As the analysis of the capital expenditure is carried out, HDTV Systems entertains
being acquired by Global Electronics. The combination is seen as perhaps offering a more
realistic setting for the large capital expenditure for manufacturing the new television project.
The case draws out financial motivations for the potential merger, as well as projections of free
cash flow for HDTV Systems as a division of Global.

1. Point of View

In this case, the point of view that will be used is the financial manager of Global
Electronics (GE). The reason is that a financial manager is responsible for the allocation of
financial resources of a company, direct investment activities, develops strategies, and plans for
the long-term financial goals of a company. Having this said, the financial manager of GE should
be the one to decide if they will push through with the high definition television project by the
HDTV system based on the cash flow projected by the company considering the long-term effect
that it can bring to GE.

2. Problem Analysis

David Carlson, the founder of HDTV Systems, has recognized the opportunity for a
regional television manufacturing company and became successful for the past 25 years with
simple products that satisfy the growing needs of an emerging middle class in the U.S. However,
technological advancement along with the increasing income of the consumers brought new
firms into the market and competed with HDTV Systems.

David Carlson wants to stay ahead in the competition that made his company build
new models and increase the production capacity based on the changing customer needs and to
maintain its market share. After all of these activities, David assigned his eldest son George to
check all the major capital proposals presented by the managers of the organization and
determine which ones became a success by comparing the projected and actual cash flows of
each proposal. Later on, they found out that the majority of the projects underperformed relative
to projections and that there is an uncertainty about how long it would take for them to have a
return on investment.

As the competition gains larger share of the market, David and George began to
explore the possibility of offering a new type of high definition televisions and after estimating
the capital budgeting inputs, the project was projected to have 13.5% IRR, which was very close
to HDTV Systems 13% weighted average cost of capital. But because of their past projects that
underperformed, they are holding back to take the risk of failing to move towards new products
and become more profitable. Therefore, they decided to search for an outside buyer for the
company which would have the capacity to insure the growth and prosperity of the organization
after David was gone. This is when Global Electronics, a leading company in consumer
electronics came in.

There were numerous strengths that HDTV systems could bring to Global Electronics,
such as, the opportunity to increase the GE’s business activity, they can grow in various markets
in a cheaper and faster way by acquiring HDTV, they have similar product line and had a
distribution network in place as well as suppliers of long-standing, and HDTV Systems’ factories
were filled with non-union workers, who were “cheaper” than its own workforce. Furthermore, if
Global decides to acquire HDTV that will remove one competitor and will hold HDTV’s
exploration of new possible products that are similar to them.

Global Electronics management used a discount cash flow approach to analyze the
value of HDTV Systems. After multiple assumptions and estimations in developing DCF,
Global’s analysis came up with HDTV System having $86,453,000 as their equity value.
Negotiations were made and in 2006, Global purchased HDTV Systems for $79,000,000.
Because of this good deal, Global Electronics wanted the complementary products of HDTV
Systems to be produced, and they became more interested to push through with the high
definition television project which was recently developed and postponed.

With all of this information, our group thinks that the problem in this case would be
Global Electronics pushing through with the high definition television project, and to know if the
project will be more beneficial to them specially in the long-run.
Objective:

• Calculate the NPV and IRR to determine if the project should be accepted or rejected.

In computing the Net Present Value, the financial manager of Global Electronics will
have an estimate of the new acquisition together with the high definition television project’s
current value considering revenue, expenses, and capital cost to see its profitability. While on the
other hand, the Internal Rate of Return will determine the possible annual growth that the project
can generate. Determining these two may help the financial manager to decide what to do with
the project.

3. Relevant Case Facts

The following SWOT Matrix represents the HDTV System's internal and external
environment.
SWOT Analysis

Opportunities Threats

Strength SO Strategies ST Strategies

Take advantage of the emerging Use the engineering design for the
demand and utilize the market new product to overtake the product
analysis and engineering design of the competitors, take advantage
that HDTV has. Since the HDTV of HDTV Systems being established
also has a higher IRR projection in the market.
than their cost of capital, they can
proceed and pursue the HDTV’s
project which is the high
definition television project.

Weaknesse WO Strategies WT Strategies

s Since Global Electronics have
more resources than the HDTV,
they can use it to continue the HD
project that was put off by the
HDTV due to uncertainties in
their projections.
Conduct a market research about the
features of the high definition
television project to gauge how
many consumers are willing to buy
the product to test if it can match
with the emerging competitors.

Strengths-Opportunities. Taking advantage of the emerging demand can be beneficial to the

profit of the company. With the market analysis and engineering design made by the HDTV, they
can continue on pursuing the high definition television project. In addition to this, they already
have the projection which shows the estimate of the profitability of the project.

Strengths-Threats. There is an increase of competitors as new firms enter the market on

television manufacturing. Global Electronics together with the HDTV Systems can use the
engineering design that HDTV has and launch the new product ahead of their competitors.
Launching the new product of the HDTV Systems will also be beneficial to them since the
HDTV management is already established in the market and has a good connection with their
consumers.
Weaknesses-Opportunities. Being the larger company, Global Electronics has more resources
and large network distribution that can accomplish HDTV's idea of high definition televisions.
Since they acquired the company already, they might as well utilize the projects that can increase
the profitability of their business. If ever the cost of capital for the project exceeds the average
13%, it wouldn't be that much of a problem for them since their company can cover it.

Weaknesses-Threats. If the management is uncertain of the payback on their project, they can
conduct a survey or a market research about their HD product to their consumers and use the
data to gauge how many are willing to patronize the product and create an estimated projection
of the payback period/return for their company. The data to be collected in their survey/research
can also be used to identify if they can match the product offers of their emerging competitors in
the market.

4. Alternative Solutions

• To pursue the recently developed High Definition Television project by the HDTV

• Not to pursue the recently developed High Definition Television project by the HDTV

With this case, there are two possible solutions for the Global electronics that they
could adapt : to pursue the recently developed high definition television created by the HDTV or
to not pursue it at all. Using the information given, we could get the NPV and the IRR and base
our decisions depending on the results and the criteria.
Decision and Recommendation

Decision Criteria

NPV
• If NPV is greater than $0, accept the project.
( NPV > $0 = accept )
• If the NPV is less than $0, reject the project.
( NPV < $0 = reject )

IRR
• If the IRR is greater than the cost of capital, accept the project.
( IRR > cost of capital = accept )
• If the IRR is less than the cost of capital, reject the project.
( IRR < Cost of capital = reject )
 Since the net present value of the high definition project ($672.13) is greater than zero,
pursuing the project should be accepted as recommended by the group. As we can see from the
table above, the Global Electronics would be better off if they would accept the project compared
to not pursuing it at all. Also, if we are to weigh based on the IRR of the two possible solutions,
the HDTV project is also preferable since IRRHDTVP = 13.48% which is greater than 13% cost of
capital compared to not pursuing the project with an IRRHDTVS = 13.45% which is also greater
than the 13% cost of capital but less than the IRR of the project, thus rejecting the solution.

With regards to pursuing the high television project, it would be beneficial to the
company since the HDTV is almost in the same market with Global Electronics, however HDTV
was further ahead in its market analysis and engineering design in regards to the planned high
definition project for the increasing consumer demand. This would definitely help the company
expand and grow in their future endeavors and to add on as they enjoy the benefits from the well-
established distribution network that HDTV Systems had before the acquisition.

5. Contingency Plan

Should the company be unable to push through with the best alternative solution, the
next best decision would be for the Global Electronics to conduct a new project on their own by
creating an innovative product that can satisfy the growing consumer demand to increase the
profitability of their business. With an even larger distribution of network due to the acquisition
of the HDTV Systems, they can have a larger share of the market in TV manufacturing.
 6. References

Gitman, L. J. (2002). Principles of Managerial Finance (10th ed.). Addison Wesley.

Nickerson, I., & Rarick, C. (2009). Journal of the International Academy for Case Studies.
Researchgate.Net. https://www.researchgate.net/profile/Kent_Byus/publication/
296164524_Southwest_Airlines_2007/links/5e2ef8ffa6fdcc30969410c4/Southwest-
Airlines-2007.pdf#page=59