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A Simple Business Case for Very Large Format Offset
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- A Business Case: Wide Format Sheet Fed Offset Acquisition An Operations Management Analysis for the Graphic Arts Rochester Institute of Technology Nick D. Barzelay May, 2007
- Approach ? Reason for acquiring VLF offset capabilities ? Business model parameters ? Business model constraints ? Capital considerations ? Cash flow considerations ? Investment analysis ? Conclusions May 14, 2007 Operations Management for the Graphic Arts 2 Copyright © 2007 Nick D. Barzelay. All Rights Reserved.
- Acquisition Reasons ? Manufacturer’s Objective: facilitate existing printers entering into new markets with an economical, reliable, efficient, unique solution ? Aligned Customer Objectives: ? Diversification & entry into new markets ? Market differentiation & flexibility ? Single sources “under one roof” supplier ? Efficiency & cost savings ? Quality, speed, & consistency May 14, 2007 Operations Management for the Graphic Arts 3 Copyright © 2007 Nick D. Barzelay. All Rights Reserved.
- Model Parameters 1. Equipment cost (including delivery, installation, & training) $ 7,952,000.00 2. Payback - 3 years (mandatory) 3. Financing - 3 year note at 8.25% (wsj prime) compounded annually 4. Operations - 3 shifts at 40 hours/week/shift 5. Revenue - operational costs + 10% margin May 14, 2007 Operations Management for the Graphic Arts 4 Copyright © 2007 Nick D. Barzelay. All Rights Reserved.
- Model Constraints ? Site preparation & auxiliary equipment - not included; company situations & regional economics will affect costs & requirements ? Financing - example only; company & regional conditions will affect terms ? Revenue - Sales flat lined for investment focus ? Depreciation - 15% to accommodate 3-shift operation (NAPL recommendation) ? Productivity - does not affect investment performance as modeled (effect on sales & value added) May 14, 2007 Operations Management for the Graphic Arts 5 Copyright © 2007 Nick D. Barzelay. All Rights Reserved.
- Invested Capital & Repayment Amortization Principal 7,952,000 Interest 1,346,715 Total Note 9,298,715 Beginning Principal Interest Total Ending Period Balance Payment Payment Payment Balance Year 1 9,298,715 2,443,532 656,040 3,099,572 6,199,143 Year 2 6,199,143 2,645,123 454,449 3,099,572 3,099,571 Year 3 3,099,571 2,863,345 236,226 3,099,571 - May 14, 2007 Operations Management for the Graphic Arts 6 Copyright © 2007 Nick D. Barzelay. All Rights Reserved.
- Cash Flow from Operations Year 1 Year 2 Year 3 Year 4 Years 5 - 7 Total Flows Fixed Costs 1,231,108 1,231,108 1,231,108 1,231,108 3,693,324 8,617,756 Variable Costs 798,682 798,682 798,682 798,682 2,396,046 5,590,774 Overhead: Sales & Admin. 649,533 649,533 649,533 649,533 1,948,599 4,546,731 Total Operating Costs 2,679,323 2,679,323 2,679,323 2,679,323 8,037,969 18,755,261 Note Repayment 3,099,572 3,099,572 3,099,571 - - 9,298,715 Total Annual Outlays 5,778,895 5,778,895 5,778,894 2,679,323 8,037,969 28,053,976 Revenue Requirement 5,778,895 5,778,895 5,778,894 5,778,894 17,336,682 40,452,260 Marginal Profit 577,890 577,890 577,889 577,889 1,733,667 4,045,225 Total Revenue 6,356,785 6,356,785 6,356,783 6,356,783 19,070,349 44,497,485 Net Income 577,890 577,890 577,889 3,677,460 11,032,380 16,443,509 May 14, 2007 Operations Management for the Graphic Arts 7 Copyright © 2007 Nick D. Barzelay. All Rights Reserved.
- Investment Analysis ? ROI (how well net income covers invested capital) = 177% ? Capital Turnover (how well sales cover invested capital) = 479% ? Net Income % of Sales (the relationship of net income to sales) = 37% ? NPV (net positive & negative cash flows compared to a similar investment) = $ 1,012,904.00 better than investment May 14, 2007 Operations Management for the Graphic Arts 8 Copyright © 2007 Nick D. Barzelay. All Rights Reserved.
- Conclusions ? Not a cure for a weak or failing company ? Strong creative sales capabilities needed ? Healthy customer base required (both current & potential) ? Financial health must be good ? Operational health must be good May 14, 2007 Operations Management for the Graphic Arts 9 Copyright © 2007 Nick D. Barzelay. All Rights Reserved.
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