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Excess - E-Commerce - Lecture Slides, Slides of Fundamentals of E-Commerce

Fakir Mohan University Fundamentals of E-Commerce

Students of Communication, study E-Commerce as an auxiliary subject. these are the key points discussed in these Lecture Slides of E-Commerce : Excess, Cost, Excess, Capacity, Opportunity, Product, Capacity, Producgon, Cost, Investment

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2012/2013

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309!

A*Framework*for*Assessing*The*Cost*of*Using*

Excess*Capacity*

309!

¨ If*I*do*not*add*the*new*product,*when*will*I*run*out*

of*capacity?*

¨ If*I*add*the*new*product,*when*will*I*run*out*of*

capacity?*

¨ When*I*run*out*of*capacity,*what*will*I*do?*

¤ Cut*back*on*producGon:*cost*is*PV*of*aQerTtax*cash*ﬂows*

from*lost*sales*

¤ Buy*new*capacity:*cost*is*diﬀerence*in*PV*between*earlier*

&*later*investment*

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309

A Framework for Assessing The Cost of Using

Excess Capacity

309

¨ If I do not add the new product, when will I run out

of capacity?

¨ If I add the new product, when will I run out of

capacity?

¨ When I run out of capacity, what will I do?

¤ Cut back on producGon: cost is PV of aQer-‐tax cash flows

from lost sales

¤ Buy new capacity: cost is difference in PV between earlier

& later investment

Opportunity Cost of Excess Capacity

310

1 50.00% 30.00% 80.00% $ Year Old New Old + New Lost ATCF PV(ATCF)
2 55.00% 31.50% 86.50% $
3 60.50% 33.08% 93.58% $
4 66.55% 34.73% 101.28% $5,115 $ 3,
5 73.21% 36.47% 109.67% $38,681 $ 21,
6 80.53% 38.29% 118.81% $75,256 $ 38,
7 88.58% 40.20% 128.78% $115,124 $ 52,
8 97.44% 42.21% 139.65% $158,595 $ 64,
9 100% 44.32% 144.32% $177,280 $ 63,
10 100% 46.54% 146.54% $186,160 $ 59, - PV(Lost Sales)= $ 303,
¨ PV (Building Capacity In Year 3 Instead Of Year 8) = 1,500,000/1.
- -‐1,500,000/1.128 = $ 461,
¨ Opportunity Cost of Excess Capacity = $ 303,

312

B. Project Synergies

312

¨ A project may provide benefits for other projects within the firm.

Consider, for instance, a typical Disney animated movie. Assume

that it costs $ 50 million to produce and promote. This movie, in

addiGon to theatrical revenues, also produces revenues from

¤ the sale of merchandise (stuffed toys, plasGc figures, clothes ..)

¤ increased asendance at the theme parks

¤ stage shows (see “Beauty and the Beast” and the “Lion King”)

¤ television series based upon the movie

¨ In investment analysis, however, these synergies are either leQ

unquanGfied and used to jusGfy overriding the results of

investment analysis, i.e,, used as jusGficaGon for invesGng in

negaGve NPV projects.

¨ If synergies exist and they oQen do, these benefits have to be

valued and shown in the iniGal project analysis.

313

Example 1: Adding a Café to a bookstore:

Bookscape

313

¨ Assume that you are considering adding a café to the bookstore. Assume

also that based upon the expected revenues and expenses, the café

standing alone is expected to have a net present value of -‐$91,097.

¨ The cafe will increase revenues at the book store by $500,000 in year 1,

growing at 10% a year for the following 4 years. In addiGon, assume that

the pre-‐tax operaGng margin on these sales is 10%.

¨ The net present value of the added benefits is $115,882. Added to the

NPV of the standalone Café of -‐$91,097 yields a net present value of

315

EsGmaGng the cost of capital to use in valuing

synergy..

315

¨ To esGmate the cost of equity:

¤ All of the perceived synergies flow from Sensient’s products. We will

use the levered beta of 0.8138 of Sensient in esGmaGng cost of equity.

¤ The synergies are expected to come from India; consequently, we will

add the country risk premium of 4.51% for India.

¨ We will assume that Sensient will maintain its exisGng debt

to capital raGo of 28.57%, its current dollar cost of debt of

5.5% and its marginal tax rate of 37%.

¤ Cost of debt in US $ = 5.5% (1-‐.37) = 3.47%

¤ Cost of capital in US $ = 12.05% (1-‐.2857) + 3.47% (.2857) = 9.60%

Cost of capital in Rs =

€

(1 + Cost of Capital (^) US $ )

(1 + Inflation RateRs ) (1 + Inflation RateUS $ )

€

(1.096)

(1.03) (1.02)

1 = 10.67%

316

EsGmaGng the value of synergy… and what Tata

can pay for Sensient…

316

¨ We can now discount the expected cash flows back at the

cost of capital to derive the value of synergy:

¤ Value of synergy Year 3 =

¤ Value of synergy today =

¨ Earlier, we esGmated the value of equity in Sensient

Technologies, with no synergy, to be $1,107 million.

ConverGng the synergy value into dollar terms at the current

exchange rate of Rs 47.50/$, the total value that Tata

Chemicals can pay for Sensient’s equity:

¤ Value of synergy in US $ = Rs 16,580/47.50 = $ 349 million

¤ Value of Sensient Technologies = $1,107 million + $349 million =

$1,456 million

€

Expected Cash Flow (^) Year 4 (Cost of Capital - g)

= 1500 (.1067 -.04)

= Rs 22,476 million

€

Value of Synergy (^) year 3 (1 + Cost of Capital)^3

= 22, (1.1067)^3

= Rs 16,580 million

318

The OpGon to Delay

318