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Excess - E-Commerce - Lecture Slides, Slides of 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

Typology: Slides

2012/2013

Uploaded on 07/29/2013

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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

(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

¨ When a firm has exclusive rights to a project or product for a specific
period, it can delay taking this project or product unGl a later date. A
tradiGonal investment analysis just answers the quesGon of whether the
project is a “good” one if taken today. The rights to a “bad” project can
sGll have value.

Present Value of Expected Cash Flows on Product

PV of Cash Flows

Initial Investment in Project NPV is positive in this section

319

Insights for Investment Analyses

319

¨ Having the exclusive rights to a product or project is

valuable, even if the product or project is not viable

today.

¨ The value of these rights increases with the volaGlity

of the underlying business.

¨ The cost of acquiring these rights (by buying them or

spending money on development -­‐ R&D, for

instance) has to be weighed off against these

benefits.