WORKING COMPUTERS, INC.
Jennifer Sobey, an analyst in the headquarters of Working Computers, has been asked to evaluate whether or not Working should sell a division of the firm which has been losing market share and requires a great deal of new investment to remain competitive. The ailing product is a personal data appliance, or PDA, that once led the market in features and innovation, only to fall prey to competition from numerous firms once it had paved the way for the product category. Complicating Jennifer’s analysis and recommendation are several political issues involving the wayward division. In particular, Working’s recently returned CEO, Stewart Workman, has decided that the product (the Bernoulli device) is a “loser” and has…show more content… The division expected to sell a total of 300,000 units by the end of 2003 at a price of $495 each. The model expected to ship beginning in late 2004 would sell at the same price point. The division’s managers estimated, though, that the revised Bernoulli would have cost of goods sold of 54 percent of the retail price with higher operating expenses of 26 percent due to increased advertising. Given the competitive nature of the industry, these price point and cost estimates are expected to remain the same for the next several years.
For strategic planning purposes, Working’s management allocated depreciation to the existing Bernoulli division as though the entire division was an asset and depreciated it using the straight line method over 10 years, with five years of operation behind it. The initial investment of $56 million had been made in early 1999. The new funds allocated to the division would be treated similarly, except that management had decided that any new investment would be depreciated using the straight line method over 5 years; due to changes in the industry since 1999, this was expected to be more consistent with the nature of the market for computing devices and PDAs. Working’s managers used a weighted average cost of capital, or hurdle rate, of 14.5 percent when evaluating capital budgeting projects, and Jennifer felt that this would be an appropriate