Task as an analyst at Walmart
As we have discussed considerably this term, the competition in the retail sector has been fierce and Amazon’s (and others’) success has been driving significant change in what and how companies operate. For this project, I would like you to put yourself in the position of an Analyst at Walmart who has been tasked to assess a new product opportunity and present a recommendation to the CFO.
Specifically, senior leadership tasked a new product development team to design and specify a competitive product for the Amazon Fire tablet (code name – Walmart Lightning). They feel this device would better position Walmart to compete with Amazon.
The new product development team worked tirelessly to develop a prototype of the Lightning that has all the features of the Fire. The cost of the prototype development was $750,000. Additionally, a marketing study was commissioned to inform the process and determine expected sales figures for the new device. The cost of the market study was $200,000.
The team identified a manufacturer for the Lightning device who will charge Walmart $205 in variable costs for each device. Walmart’s fixed costs for the manufacturing operations are estimated to run $5.1M per year. The estimated sales volume for the device is 64,000, 106,000, 87,000, 78,000, and 54,000 per year for the next 5 years respectively. The unit price of the Lightning will be $485 each. In order to offer this device, Walmart must update its logistics systems infrastructure. The cost of the upgrade for infrastructure is $34.5M and will be depreciated on a seven-year MACRS schedule. It is believed the value of the equipment in five years will be $5.5M.
Net working capital for the Walmart Lightning will be 20% of sales and will occur with the timing of the cash flows for the year (e.g., there is no initial outlay for NWC). Changes in NWC will thus first occur in Year 1 with the first year’s sales. Walmart has a 35% corporate tax rate and a required return of 12%.
The CFO has asked that you provide your recommendation on the go/no-go for this project based on your analysis of the financials of the Lightning itself and your research and knowledge of Walmart’s strategic positioning in the industry.
Proposed structure of the presentation (no more than 10 slides with an unlimited length Appendix):
- Summary of recommendation and supporting points
- Financial analysis of the project
- Non-financial analysis of the project (e.g., impact of product in the industry; competitive impact; etc)
- Restatement of recommendation and supporting points
The specific financial measures have been requested by the CFO:
- What is the payback period for the project?
- What is the profitability index of the project?
- What is the IRR of the project?
- What is the NPV of the project?
- How sensitive is the NPV to changes in the price of the new device?
- How sensitive is the NPV to changes in the quantity sold?
- Please provide proforma financial statements in the Appendix of your presentation
Grading Rubric:
- Recommentation and support (20%)
- Financial analysis of the project (50%)
- Non-financial analysis of the project (20%)
- Overall quality of the presentation (10%)
Please note any assumptions that you make for this presentation as a footnote and turn in both your presentation and your supporting Excel file. Good luck!
Source of much of the material adapted for this project: Ross, Westerfield and Jordan. Essentials of Corporate Finance 8thEdition. New York, NY: McGraw-Hill