GEO TECH Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

GEO TECH

Problem Statement

Geo Tech wants to enter into Canadian market through establishing its site into Canada. But Thomas Boyatt is not sure about whether the investment would be successful or not.

Analysis

Since Geo Tech offers its services using its servers from remote location hence; it could establish another site within the US to accommodate timberland companies in Canada. But the issue was that Canadian companies were reluctant to provide access to their sites and sophisticated data to a US based site.

Therefore, the plan for establishment of Canadian site was being proposed for a temporary period of five years to develop the confidence of Canadian timberland owners. Afterwards, Canadian clients data would be shifted to US based site and Geo Tech would continue to provide services from US based site. Thomas Boyatt involved one of his employees, Jessica Engle who was looking after of company’s economic timber models in order to prepare an analysis and check the feasibility of investment project. The analysis has been made on some estimates and assumptions such as period of the project, investment amount, number of contracts sold and operating expenses. The major concern of Boyatt is on number of contracts that would be sold during the five year project life.

Timing of the revenue and cost associated with the project was a bit complicated but for the simplicity of analysis it had been assumed to occur at the end of each year concerned. Another important factor in this analysis was the involvement of foreign exchange risk. Since Geo Tech was based in U.S. and was investing in Canada, which meant that inflow and outflow of Canadian dollar would be expected; that would expose the company to foreign exchange risk. On the other hand, set-up and annual licensing fee of the contract could not be increased due to the market pressure and inflation therefore; it is assumed that prices would not change during the project period.

A detailed analysis of the proposed investment project has been carried out based on net present value (NPV) technique. NPV model uses the future cash flows expected to occur during the project life, and discount them at appropriate discount rate, that is adjusted for the risk associated with investment. An initial analysis of net present value shows a positive value of the project amounting to USD. 90,160/-, which means that the decision to establish Canadian site will add a value to Geo Tech equal to the NPV of the project.

However the above value of NPV is based on some assumptions as agreed by Boyatt and Jessica Engle, and evaluation of the assumptions has been carried out to further establish the viability of the project.

No Salvage Value Assumption

Above NPV has been calculated on the assumption that salvage value of the equipments, that would be used in the project, would be nil at the end of project’s five year life. Meanwhile, it was stated that equipment could be sold for Canadian Dollar (CAD) 100,000/-, if this salvage value was considered in net present value analysis, then it would increase the NPV by USD. 41,008/-, this increase in NPV would make the project more attractive for Geo Tech in terms of value addition.

Assumption to Omit Inflation

While arriving at net present value of USD 90,160/-, inflation in operations cost has been ignored. Since investment is being made in Canada hence; the cost will be inflated using the applicable inflation rate in Canada. An assessment of inflation effect on cost of operations will decrease the net present value of the proposed project by USD. 21,226/-.

In addition to above assumptions, cost of operations is assumed to increase by 65% and 20% of setup and annual licensing revenues is also assumed to increase respectively, which can be different in reality and may deteriorate the net present value. Moreover, working capital is assumed to be 10% of total revenues and if this assumption fails at any time during the operations, it will be a disaster for Geo Tech to manage cash requirements of its daily operations.

Purchasing Power Parity

Investment in Canadian project will expose Geo Tech to the foreign exchange risk, although Engle has obtained forecast of future exchange rates to protect Geo Tech from adverse movements in exchange rate however, forecast may be based on experts opinion but the future exchange rates based on purchasing power parity (PPP) provides the reasonable estimates of future exchange rate, because PPP considers the inflation rates applicable in both home and foreign countries while calculating future exchange rate.

An evaluation of net present value based on exchange rates calculated using purchasing power parity will increase the net present value of project by USD. 18,892/-.

Sensitivity of Exchange Rates

Sensitivity analysis of exchange rates shows that only a slight adverse movement of 5.5% in exchange rate each year will turn the project value to zero. Hence, it is suggested that a hedging strategy such as forward exchange contract can be used to hedge the exchange rate.................................

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