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Trim or Not to Trim Case Study Solution

Decision based on the Calculation of NPV on Excel

Dropping all the 50 products manufactured by the company will result in the reduction of net present value of the company by CHF 1645.6 million pounds within the period of 10 years. Although the yearly net cash flow before tax are also positive but are declining at the end of the tenth year. Company should not drop all the 50 products in the first few years but focus on dropping those products whose revenues are less than the total cost of producing the particular products. If the result of dropping the products with less revenue results in increasing the cash flows for coming year than the company should use the increase in cash flows in marketing and promotional activities. If dropping the few products does not result in increased cash flow in the coming years then company should consider dropping all the 50 products so that the company could implement the strategy of marketing and promotional tactics to increase the total cash flows that will be generated by the company in the coming year. Therefore, company should first consider dropping the loss generating product then it should focus on dropping all the 50 products to increase the cash flows generated by the company in the coming future.

The assumption undertaken by the company to calculate the net cash flow lost by dropping all the 50 products is the use of 12 percent discount rate and the assumption that the 50 percent of the fixed costs will be reduced after dropping all the 50 products considered for dropping. The other assumption is the growth rate considered by the company in calculating the future cash flows generated by selling those products. Hence, growth rate and discount rate appears to be the most critical assumption which would change the decision by Novartis a pharmaceutical company as the growth rate and discount rate is directly related to cash flows generated by selling those products. Hence, the growth rate and discount rate could impact the decision making process of the Novartis because uncertainty of these assumptions could change which would either increase or decrease the cash flows generated by the products. Hence, the increase in cash flows will revert the decision of dropping the 50 products considered by the company.

Price Charged by Novartis

Hence, the net present value of the 50 products is CHF 1654.6 million. Although, it could be changed based on several assumptions used in the calculation of NPV. The growth rate and revenue from most of these products could also be increased by investing in marketing and promotional strategies which could further enhance the cash flows of these products. Therefore, the company should charge the price between CHF 1654.6 million to CHF 2000 million.

Recommendation

Thomas Belling should consider selling few low revenue generating product to the buyer which will enable Novartis to generate free cash flows. Moreover, most of the products are in mature phase which means there growth is expected to decline in the near future. Therefore, with the free cash flows generated by selling those products could be used in developing new products which will assist the company in achieving positive growth rate in the coming future. Moreover, the cash flows generated by the sale of the products will enable the company to spend on marketing and promotional strategies which will further help the company to boost the revenues through products which require investment in advertising and promotional strategies. Therefore, Belling should consider selling the products which could generate enormous cash flow for the company......

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