TITANIUM S.A.

Guide for case preparation

1.- Analyse the first investment proposed.

2.- Do you think that the company should purchase the new machine?

Suppose in both cases that all the current assets are financed by
suppliers.
 TITANIUM S.A.1

Early in October 2003, Antonio López, managing director of Titanium S.A.,

had to decide whether to give the go ahead to one of the latest projects to
be presented to him by his marketing and production managers.

The company

Titanium S.A. was founded in 1975 and is a major world producer of

titanium derivatives. While titanium is found abundantly in nature, the
process of mining and refining titanium often makes it less competitive
than its eternal rival, steel. After some difficult early years, the company
has been turning a profit since 1979.

Titanium manufactures a large number of titanium based products, one of

the most important of which is surgical instruments, accounting for nearly
40% of the company’s turnover. The minimum return Titanium demands
from its businesses is 15% after taxes, while the tax rate is around 35%.

I. The project

One of the properties of titania, a derivative of titanium, is that when it is

polished it shines brighter than a diamond, although it is not quite as
hard.

The marketing and production departments have developed a project

which they think will turn the production of titania into a new, more
profitable business line: fantasy jewellery.

This would require the acquisition of a sophisticated machine for cutting

and polishing titania. The best offer received puts the estimated final cost
of the machine – imported, installed, and tested – at 695,700 dollars.

1
Professors María Luisa Garayalde and María José López prepared this case as the basis
for class discussion rather than to illustrate either the effective or ineffective handling of
an administrative situation. No part of this case may be reproduced, stored in a retrieval
system, used in a spreadsheet or transmitted in any form or by any means without the
written permission of the authors.
Expected sales and costs (mainly the raw material and the hiring of an
expert polisher) are set out below:

Figures in thousands of dollars

2004 2005 2006 2007 2008

Expected sales 200 500 600 700 500
Costs 90 225 270 315 225

The time frame for the project is five years, not only because of the
difficulty of forecasting further ahead, but because it is expected that the
competition will enter the market in strength form the sixth year on and
will erode sales.

II. Renewal of machinery

In January 2004 the machine went into operation and the budget was met
with such ease that everything seemed to suggest that the business would
continue that trend. In the summer of 2005, Titanium received a second
offer from the supplier of the machine; it was shortly bringing out a model
featuring new technology at a total price of around 720,000 dollars. The
useful life of the machine was estimated to be five years, after which the
residual value would be practically nil. If Titanium were to buy it, the
supplier was willing to buy back the first machine for 100,000 dollars at
most. The new machine would provide savings of around 35,000 dollars a
year over the previous estimates.

When he asked for the forecast for 1999 and 2000, the managing director
found it less than optimistic:

Figures in thousands of dollars

2009 2010
Expected sales 100 70
Costs 80 80