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Finance 316 Case

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Submitted By jane910114
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Capital Budgeting Case

The Gillette Company is a globally company which focuses in male grooming products. In order to maintain Gillette Company’s market leadership, the company recently has introduced Excel and MACH3 these two new products into the market. Compared the analysis of income statements of Excel and the combination of MACH3 and Excel, we found out that the Gillette Company should go forward with the development of the MACH3 shaving system because we found the net present value of the combination of MACH3 and Excel is higher than the net present value of Excel system.
Through the information, we found out that the sales of MACH3 during 2009~2014. “Gillette’s sales of the Excel line are expected to reach $1 billion per year by 2007 and to stabilize at that figure. However, the introduction of the MACH3 is expected to replace 8% of Excel’s sales”. Hence, we knew that the revenue of Excel is 92million [(1-8%)*1billion] in the system of MACH3 and Excel, while the revenue of Excel is 1 billion every year during 2009-2014 just in Excel system. Under MACH3 & Excel system, the expense includes manufacturing expense (6% of MACH’s sales; 75% of Excel’s sales), interest expense (6% of loan—300million) and advertising expense (70million-09, 50million-10, 2011-2014 decline at 20%). The useful life is 5 years, so through the table 9-2 we can calculate the depreciation expense in each year. Then we can calculate the gross profit before tax (= revenue-expense-depreciation). Since the tax rate is 35% so we get the gross profit after tax (=pretax profit-income tax). After we looked through the profit, then we need to record the cash flow. It is the value of add up the depreciation and net profit. Thus, the total cash flow comes up with the values calculated from the front parts. Despite that, the discount rate is 0.077 which is quite important so the final

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