CALLAWAY FX-1 PROJECT Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

CALLAWAY FX-1 PROJECT Case Solution

The key costs and benefits associated with FX-1 Project are the upfront costs of design and engineering, costs of molds and pre marketing overhead expenditures. Along with this, other costs associated with the FX-1 Project are the ongoing costs of the goods sold and the incremental working capital requirements. The benefits of this project are that it will allow for a much greater carbon composite body and the world’s straightest driver for allowing greater weight distribution to the corners of the club and thus it would create more stability. The combination of the FT hybrid drivers with the new set of the irons will provide the optimal combination for forgiveness and control for the ultimate course experience.

2). The overall gross margin for the FX-1 Project has decreased during the four years period, whereas the gross margin for Callaway Gold Club has fluctuated over the same period. However, the profit potential for covering the major portion of the cost of goods sold is higher for FX-1 Project as compared to Call away overall.

3). First of all, if we talk about the earnings of Call away Club after the FX-1 Project, then the earnings would be higher in the first year which would be 2007. The earnings would also be higher than their current level till the third year of the project. However, after this, the earnings for Call away would decline as the NOPAT from FX-1 Project would also become negative. On the other hand, the available cash in years 2006 and 2007 would decrease significantly, due to significant capital expenditures for FX-1 Project. Nonetheless, the available cash balance for the next three years of the project would be higher than the current level.

4).The available cash in years 2006 and 2007 would decrease significantly, due to significant capital expenditures for FX-1 Project. However, the available cash balance for the next three years of the project would be higher than the current level. The implications for the decline in the available cash are that the management will have to borrow more debt or issue more equity in order to meet the deficit. However, the management will have to consider the future capability of the company in the next three years of the project for repaying this debt or paying dividend to its shareholders.

5).

a. The value of this opportunity or the net present value of this project at a constant discount rate of 10.5% would be $ 496,500. The internal rate of return on the initial upfront expenditures would be 15.8% and the payback period would be 3.018 years. Therefore, the management should undertake this project since it has good returns and the NPV is positive which covers all the other resources consumed by the FX-1 Project.

b. The only concern which we have regarding the above recommendation is that, the cash flows and profitability for this project are declining therefore, the management might have to stop selling this product once the market for this project reaches its saturation point.

Sensitivity Analysis

6).The value implications for both of these pricing strategies are as follows:

The value implications for the Market Premium price are that if the sales price per iron is increased by 10% in each year and sales volume decreased by further 10% in each year.Moreover, the internal rate of return on the initial upfront expenditures would be 22.3%, NPV would be $ 1259800 and the payback period would be 3.018 years. On the other hand, if the Strategy Market Share is adopted where selling price decreases further by 10% and sales volume increase by 30%, then the value implications for this strategy are that the internal rate of return on the initial upfront expenditures would be 4.6%, NPV would be $ -605800 and the payback period would be 3.270 years. Therefore, based on these results, the Market Penetration pricing strategy is recommended......................

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