X-cita is a multinational organization that is listed in New York Stock Exchange. The Product Development Team
Question:
X-cita is a multinational organization that is listed in New York Stock Exchange. The Product Development Team of X-cita has proposed two new lines of switching devices. However, due to
similarity in the devices features and capital constraints, the X-cita management conducted extensive financial analysis to select the most profitable device. Both devices require capital
investment of $200 million and have 10-year lifetime. Using estimates for each year of the product life, David - the CFO of X-cita,- concluded that switching device (A) will payback during 3-years' time and would result in a positive net present value (NPV) of $60 million. On other side, switching device (B) is expected to result in a positive net present value (NPV) of $100 million but will payback within 6 years'-time.
During the Board of Directors meeting, David commented that device (B) looked very promising due to high net present value. Yet, a board member expressed concern about the long payback
period of device (B) and suggested to select project (A). In the context of the Case, answer the following questions:
1. Determine whether the two devices are mutually exclusive or independent investments? Explain your answer.
2. Based on the financial analysis conducted, which project should be selected? Why?
3. Explain the pros and cons of the two investment appraisal techniques used by the CFO.
4. Describe the three types of activities reported on the statement of cash flows and explain under which type should the selected project be reported .
5. What forms of organization does X-cita represent? Do the creditors have the right to claim over the personal wealth of the owners in case of default? Explain your answer.
Basic Marketing Research
ISBN: 978-1133188544
8th edition
Authors: Tom J. Brown, Tracy A. Suter, Gilbert A. Churchill