ACE Company

ACE Company

Introduction

ACE company was one of the leading company in the technology industry, making

portable electronic games. The company was enjoying high sales of its Model X which was

introduced some years back, but the management were concerned about the about the future

prospects of the model X because of the increased competition from other types of

entertainment. After the estimation of the future of the Model X, the management decided to

introduce new project in the market by the name of Model Z.

Problem Diagnosis

After the decision to introduce another product, the management of the ACE Company

had to decide when to launch the product. They had two options, either introduce the new

product after 1 year from now (i.e. At the beginning of the year 2) or introduce it after 2 years

(i.e. At the beginning of year 3). There were some cost and benefits associated with the timely

introduction of the new product. Selecting one option means to forego some opportunity cost of

another option.

Analysis

After conducting analysis of both projected way to introduce Model Z, we have noticed

that the net present value of the second option (introduction of model Z at the beginning of the
 ACE Company

year 3), produced higher NPV than the first option, because of the two main advantages. The

late introduction will benefit the sales of model X and it will not erode its sales. Another benefit

of late introduction of model Z was the reduction in the initial investment cost associated with

the 1 year plan.

First Option

In the option one, the company was generating no money in year 0, but afterwards 400

in the years 1, $500, $600, $300 and $100 (all in millions) in the year 2, 3, 4 and 5 respectively.

On the other hand. The outflows were $550 million at the end of the year 0 which were

associated with the development and introduction of model Z.

After discounting it with discount rate of 10%, we have found the NPV of $858.8

million at the end. The opportunity cost associated with this option was savings in the

development and introduction cost and non cannibalization of model X sales by $100 million.

Second Option

In the second option, i.e. the late introduction of the model Z was producing 0 in year 0,

$400, $300,$600,$300 and $100 (all in million) in the years of 1, 2, 3, 4 and 5 respectively. The

outflows were $300 million split into 2 years.

After discounting it with a 10 % discount rate, the project produced a positive NPV of

$948.2 million. The opportunity cost associated with this option was $300 million sales value in

the year 2, which will be lost if model Z was introduced early.

 ACE Company

Conclusion

After conducting careful analysis and evaluation of the project, we have concluded that

ACE Company should introduce model Z after 2 years, as that option provides higher net

present value and higher cash flows to the company than the first option. So, the company will

be in favorable conditions if it introduces model Z after 2 years.

 ACE Company

Appendices

Introduction of Model Z after One Year

Years 0 1 2 3 4 5

$ $ $ $ $ $
Inflows from Model X - 400.0 200.0 100.0 - -
$ $ $ $ $ $
Inflows from Model Z - - 300.0 500.0 300.0 100.0
$ $ $ $ $ $
Total Inflows - 400.0 500.0 600.0 300.0 100.0

Les Outflows associated with $ $ $ $ $ $

s: Model X - - - - - -
Outflows associated with $ $ $ $ $ $
Model Z (550.0) - - - - -
$ $ $ $ $ $
Total Outflows (550.0) - - - - -

$ $ $ $ $ $
Net Cash Flows (550.0) 400.0 500.0 600.0 300.0 100.0

$
NPV 858.8
 ACE Company

Introduction of Model Z After Two Years

Years 0 1 2 3 4 5

$ $ $ $ $ $
Inflows from Model X - 400.0 300.0 100.0 - -
$ $ $ $ $ $
Inflows from Model Z - - - 500.0 300.0 100.0
$ $ $ $ $ $
Total Inflows - 400.0 300.0 600.0 300.0 100.0

Le Outflows associated $ $ $ $ $ $
ss: with Model X - - - - - -
$
Outflows associated $ (150.0 $ $ $ $
with Model Y (150.0) ) - - - -
$
$ (150.0 $ $ $ $
Total Outflows (150.0) ) - - - -

$ $ $ $ $ $
Net Cash Flows (150.0) 250.0 300.0 600.0 300.0 100.0

$
NPV 948.2