Parts A and B Piscataway valves decided to pursue development of a new product line for natural gas pipelines. The development effort has been successful and Piscataway is preparing to begin manufacturing and marketing the new product line next year. Piscataway has learned that marketing to natural gas pipeline companies requires commercial skills and experience they do not have. Management has, as a consequence, decided to have a partner and are in serious discussions with two companies having the requisite marketing expertise: Fargo Pipeline Supplies (FPS) and Quantum International (QI) Note: For this question, all cash flows are incremental cash flows. Part A: FPS Proposal FPS would provide only marketing, sales, and distribution for natural gas pipeline valves. $7,465 in Year 0 Piscataway would have to invest in faciliites to manufacture the valves, spending Piscataway would have to invest in faciliites to manufacture the valves, manufacture the valves themselves, and incur administrative expenses. Total cash-out fillow for these are as shown below.
Parts A and B Piscataway valves decided to pursue development of a new product line for natural gas pipelines. The development effort has been successful and Piscataway is preparing to begin manufacturing and marketing the new product line next year. Piscataway has learned that marketing to natural gas pipeline companies requires commercial skills and experience they do not have. Management has, as a consequence, decided to have a partner and are in serious discussions with two companies having the requisite marketing expertise: Fargo Pipeline Supplies (FPS) and Quantum International (QI) Note: For this question, all cash flows are incremental cash flows. Part A: FPS Proposal FPS would provide only marketing, sales, and distribution for natural gas pipeline valves. $7,465 in Year 0 Piscataway would have to invest in faciliites to manufacture the valves, spending Piscataway would have to invest in faciliites to manufacture the valves, manufacture the valves themselves, and incur administrative expenses. Total cash-out fillow for these are as shown below.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Question 4
Parts A and B
Piscataway valves decided to pursue development of a new product line for natural
gas pipelines. The development effort has been successful and Piscataway is preparing
to begin manufacturing and marketing the new product line next year.
Piscataway has learned that marketing to natural gas pipeline companies requires commercial
skills and experience they do not have. Management has, as a consequence, decided
to have a partner and are in serious discussions with two companies having
the requisite marketing expertise: Fargo Pipeline Supplies (FPS) and Quantum International (QI)
Note: For this question, all cash flows are incremental cash flows.
Part A: FPS roposal
FPS would provide only marketing, sales, and distribution for natural gas pipeline valves.
Piscataway would have to invest in faciliites to manufacture the valves, spending $7,465 in Year 0
Piscataway would have to invest in faciliites to manufacture the valves, manufacture the valves themselves, and incur administrative expenses.
Total cash-out fllow for these are as shown below.
($s in 000s)
Year
Cash-In Flow (Payments from Customers)
Total Cash Outflow
4
6
2
3
5
$7,515 $12,515 $18,375 $23,810 $25,305
$5,045
$8,135 $11,025 $14,285 $14,920
12% of payments to customers to compensate them for marketing.
1
$3,700
$2,750
In addition, FPS would receive an annual fee of
These payments are not included in the Total Cash Flow above.
Piscataway's CFO has decided to use a required rate of return of
(i) What would be Piscataway's net operating cash flow if they choose FPS?
(ii) What is the net present value of the FPS proposal?
20% to evalaute the FPS proposal.
(ii) What major risk factors might have gone into the CFO's choice of the above required rate of return?
7
$27,175
$14,945
8
9
$36,875 $37,825
$20,280 $20,800
10
$37,900
$20,815
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