Nu View Monitor: Cash Flow ConceptsCash Flow Questions from NuView Monitor:

Licensing Fees for Non-exclusive License * Lump Sum * Royalties

Market Research Expenses

Sales * To new users (80%) * To potential users of color monitors (20%) * Erosion of color monitor sales (Exhibits 3 and 4)

Equipment Purchases * Cannot use existing equipment to produce new HR monitors. * Cannot use new equipment to produce existing color monitors.

Lease space

Costs of Production * Materials costs * Labor costs

Overhead * Corporate overhead for headquarters staff * Additional salaried engineers, quality control, and supervisory staff

Marketing and General & Administrative Costs

Working Capital Requirements

Depreciation

Terminal Value

Nu View Monitor Cash Flows1994 1995 1996 1997 1998 1999

Units Sold 15000 18000 21000 24000 30000Price per Unit Sold 465.00 440.00 430.00 420.00 415.00Labor Cost per Unit 49.39 50.87 52.40 53.97 55.59Parts Cost per Unit 113.74 107.30 101.23 95.50 90.09Total Cost per Unit 163.13 158.17 153.63 149.47 145.68

Sales $6,975,000 $7,920,000 $9,030,000 $10,080,000 $12,450,000 Cost of Sales 2,446,950 2,847,125 3,226,147 3,587,234 4,370,448Gross Profits 4,528,050 5,072,875 5,803,853 6,492,766 8,079,552Marketing Expense 837,000 950,400 1,083,600 1,209,600 1,494,000Royalty 150,000 180,000 210,000 240,000 300,000Manufacturing Overhead 475,000 475,000 475,000 475,000 475,000Building Lease 0 0 118,750 118,750 118,750G&A Expenses 1,046,250 1,188,000 1,354,500 1,512,000 1,867,500Depreciation 1,006,200 1,609,920 965,952 578,565 578,565Earnings Before Taxes 1,013,600 669,555 1,596,051 2,358,851 3,245,737Taxes 405,440 267,822 638,420 943,540 1,298,295Net Income 608,160 401,733 957,631 1,415,311 1,947,442Depreciation 1,006,200 1,609,920 965,952 578,565 578,565Operating Cash Flow 1,614,360 2,011,653 1,923,583 1,993,876 2,526,007Changes in NWC -2,092,500 -283,500 -333,000 -315,000 -711,000 3,735,000Changes in Investment -5,031,000 0 0 0 0 1,914,155Total Cash Flows ($7,123,500) $1,330,860 $1,678,653 $1,608,583 $1,282,876 $8,175,162

NPV Profiles for Nu View Monitor

($3,000,000)

($2,000,000)

($1,000,000)

$0

$1,000,000

$2,000,000

$3,000,000

$4,000,000

$5,000,000

$6,000,000

$7,000,000

$8,000,000

0.00% 2.50% 5.00% 7.50% 10.00% 12.50% 15.00% 17.50% 20.00% 22.50% 25.00% 27.50% 30.00%

Discount Rate

NPV

Corporate Strategy and the Capital Budgeting Decision

By

Alan C. Shapiro

Barriers to Entry and Positive NPV Projects

• Economies of Scale

• Product Differentiation

• Cost Disadvantages

• Access to Distribution Channels

• Government Policy

Finding Positive NPVs in Today’s Markets

• Computer Industry

• Retailing Industry

• Fast Food Industry

Computer Industry

Cumulative Excess Returns for IBM & Compaq (1996 - 2000)

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Compaq

IBM

Retailing Industry

Cumulative Excess Returns for K Mart and Wal Mart (1996 through 2000)

-1.00

-0.50

0.00

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1.00

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Wal Mart

Fast Food Industry

Cumulative Excess Returns for McDonalds and Wendy's (1996 through 2000)

-1.00

-0.80

-0.60

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0.00

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Wendy's

McDonalds