The Procter and Gamble Company: Investment in Crest Whitestrips Advance Seal
Case 23: The Procter and Gamble Company: Investment in Crest Whitestrips Advance Seal
Question: To calculate the NPV of the new product.
A. Establishing a Base Case
Price (per unit) = $22
Cost (per unit) = $12
Gross profit (per unit)= $10
Annual forecast units sold= 2,000,000
Net working capital (incremental average at 9%) = $601,740
Incremental advertising expense (for new product) =$2,000,000
Incremental selling, general & administrative expense = $1,000,000
Capital expenditures (R&D) = $4,000,000 (depreciable asset)
Development expenses (one time) = $1,500,000 (to get the project going)
Depreciation (reporting method) = Straight-line schedule
Salvage value = 0
Project Life = 4 years
Discount rate = 8%
Tax Rate = 40%
- Initial outlay:
Capital expenditures (R&D) $4,000,000
+ Development expenses (one time) $1,500,000
+ Net working capital $ 601,740
Total initial outlay $6,101,740
- Annual Cash flow for YR 1 to 4:
Increased Revenue (2mil x $10) $20,000,000
- Incremental advertising expense ($ 2,000,000)
- Incremental selling, general &
administrative expense ($ 1,000,000)
- Depreciation ($ 1,000,000)
EBIT $16,000,000
- Taxes (40%) _ ($ 6,400,000)
EAT $ 9,600,000
+ Depreciation $ 1,000,000
Annual Cash flow (Yr 1-4) $10,600,000
- Terminal cash flow:
Total Salvage value $ 0
Total book value $ 0
Tax on capital $ 0
Recapture of net working capital _ $601,740
Terminal cash flow _ $601,740
- Project NPV:
CF0 = - $6,101,740
CF1 = $10,600,000
CF2 = $10,600,000
CF3 = $10,600,000
CF4 = $10,600,000 + $601,740
= $11,201,740
i = 8%
NPV = $29,449,101.37
B. Drive Revenue (Strategy A)
Price (per unit) = $21
Cost (per unit) = $12
Gross profit (per unit)= $9
Annual forecast units sold= 3,250,000
Net working capital (incremental average at 9%) = $601,740
Incremental advertising expense (for new product in YR 1) =$3,500,000
Incremental advertising expense (for new product after YR 1) =$2,000,000
Incremental selling, general & administrative expense = $1,000,000
Capital expenditures (R&D) = $4,000,000 (depreciable asset)
Development expenses (one time) = $1,500,000 (to get the project going)
Depreciation (reporting method) = Straight-line schedule
Salvage value = 0
Project Life = 4 years
Discount rate = 8%
Tax Rate = 40%
- Initial outlay:
Capital expenditures (R&D) $4,000,000
+ Development expenses (one time) $1,500,000
+ Net working capital $ 601,740
Total initial outlay $6,101,740
- Annual Cash flow for YR 1 :
Increased Revenue (3.25mil x $9) $29,250,000
- Incremental advertising expense (Yr 1) ($ 3,500,000)
- Incremental selling, general &