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(Solved) Webster University - Greenville Metro FINC 5880 - Summer


hi I need a great finance tutor to evaluate the study team?s findings and calculate the project?s cash flows and economic returns to the company attached. I have attached a sample business case as a guide along with the case being presented and instructions.
Webster University ? Greenville Metro

 

FINC 5880 ? Summer 2016

 

Team Project

 

Big Breeze Fans

 

Background

 

Big Breeze Fans got its start 45 years ago as a manufacturer, seller, and installer of fans for industrial

 

sites. They invest heavily in fan technology and lead the nation in sales of fans to large industrial

 

customers. Big Breeze developed a reputation for innovative design and energy efficiency that allows

 

them to charge a premium price for their fans. Likewise, many Big Breeze sales representatives enjoy the

 

generous expense accounts and healthy commissions that the steep margins on a large sale to an

 

industrial customer make possible.

 

While the investment made in product engineering and research paid off handsomely over the first 40

 

years of the company?s history, sales reached a plateau and Big Breeze has not been able to increase

 

prices over the last five years. Concerned about the company?s future, 3 years ago Big Breeze?s executive

 

management team developed a new long-term strategic plan. The plan looks out 10 years into the

 

future and caused some dramatic shifts in the company?s thinking.

 

The plan called for the creation of a new product line designed for luxury homes. Big Breeze had never

 

designed fans for consumer use, however, it appeared more and more architects and designers were

 

ordering industrial fans for large spaces in their clients new ?estate ? sized? homes. As a result of

 

additional market research, Big Breeze concluded there was, indeed, a healthy demand for industrial

 

quality fans for the retail market. Two years ago, Big Breeze retooled a section of their main

 

manufacturing facility and began producing smaller diameter, lower horsepower fans. Robust sales of

 

the new product line encouraged them to expand their consumer grade fan building capacity.

 

Because of the relatively limited run of fans produced in the initial test of the market, Big Breeze decided

 

it would sell the fans via the internet and use third parties to distribute and install the fans (Big Breeze

 

delivers and installs 100% of its industrial fans). This new fulfillment model worked so well, that Big

 

Breeze intends to expand its online presence and market and distribute consumer fans strictly via the

 

internet.

 

Another initiative called for by the strategic plan was to conduct customer satisfaction surveys and

 

determine why industrial fan sales had stagnated. A major marketing research firm was hired to gather

 

and analyze feedback from customers. What the surveys uncovered was eye-opening to Big Breeze

 

executives. The surveys revealed that industrial customers who ordered large quantities of fans were

 

generally very satisfied with the product and the customer service they received. Large customers often

 

credited their Big Breeze sales representative with providing a seamless customer experience. Unlike

 

large, well established industrial customers, however, more entrepreneurial customers were completely

 

dissatisfied with the service they received and felt the company had not lived up to its marketing pitch.

 


 

1

 

Big Breeze Business Case

 


 

The main problems experienced by smaller customers seemed to be missed delivery and installation

 

deadlines, confusing paperwork and billings, and uncertainty over the credit terms they would be

 

extended. Cash flow was critical to smaller customers and Big Breeze made it difficult for the small shop

 

or retailer buying only one or two fans to predict when the bills would be presented or due. Smaller

 

customers said they definitely WOULD NOT recommend Big Breeze fans to a business associate.

 

Management concluded from the research results that industrial fan sales would indeed be slowing if a

 

better service experience could not be provided to new start-up businesses and smaller customers.

 

After further investigation, it appeared the ?back-office? processes used by Big Breeze were a major

 

impediment to achieving a great customer experience for smaller industrial fan buyers. The consultants

 

advised Big Breeze to investigate implementing a CRM (Customer Relationship Management) System. A

 

CRM would enable Big Breeze to streamline the order and fulfillment process, providing much better

 

service to its smaller industrial customers. In addition, a CRM was especially critical for support of online

 

marketing and sales and would be needed if Big Breeze wanted to aggressively expand their consumer

 

product line.

 

The industrial fan fulfillment process, shown as exhibit 1, had evolved over time such that, without a

 

sales representative to intervene, the process created delays and undue confusion for a customer. For

 

large industrial accounts, the sales reps worked diligently to keep customers informed and to prioritize

 

their orders over smaller customers. As such, the sales reps protected their commissions and had, over

 

time, built a fulfillment system that only an experienced sales person could effectively navigate.

 

Implementing a CRM would drive radical change in the fulfillment process and would require sales

 

representatives to do more work upfront to feed information to the system. That upfront information

 

was used by the CRM to automatically check inventories, schedule deliveries, and order installations.

 

Moreover, the CRM provided information that enabled anyone at Big Breeze to resolve customer issues.

 

Sales representatives would also be more productive because they would now be able to handle a larger

 

number of customers. A CRM, however, was not a popular idea with the sales reps. While greater sales

 

productivity could potentially increase their commissions, many sales representatives thought adding

 

more customers to their workload would not be worth the extra salary earned.

 

Economic Costs and Benefits

 

Big Breeze executives appointed a team to conduct a feasibility study and investigate various CRM

 

systems that could be implemented. The team was told to use a 7-year life for the project as technology

 

changes would require Big Breeze to adopt a replacement system at the end of 7 years. The team was

 

also told to estimate inflation at 2% over the life of the project.

 

The study team met with various software vendors and saw CRM systems in action at some of the

 

vendor?s clients, after which the study team recommended Big Breeze?s fulfillment process be revised as

 

shown in exhibit 2.

 


 

2

 

Big Breeze Business Case

 


 

Based on study findings, the cost of implementing the new system would be $15 million and it would

 

take an entire year to set up the CRM and train employees in its use before it could be brought online.

 

Benefits to be gained were estimated by the team as well. Because of process streamlining, there would

 

be a reduction of labor required to perform back office functions. Sales projections were also made

 

based on track records of other businesses who had gone through a CRM conversion. The study team?s

 

benefit estimates are as follows:

 

Sales Increases ? Year over Year Growth Estimates:

 

Current

 

Year 1

 

Year 2

 

Units Sold

 

% growth

 

% growth

 

per Year

 

Industrial

 

50,000

 

No growth

 

7.5 %

 

Fans

 

Consumer

 

25,000

 

15.0%

 

15.0%

 

Fans

 


 

Year 3

 

% growth

 


 

Year 4

 

% growth

 


 

Year 5

 

% growth

 


 

7.5%

 


 

No growth

 


 

No growth

 


 

15.0%

 


 

15.0%

 


 

15.0%

 


 

Sales for industrial fan are not projected to increase until two years after CRM implementation because

 

of the sales personnel learning curve and organizational change issues. Because of uncertainty over the

 

industrial market, growth is not projected to increase beyond the 3 rd year after implementation. Sales of

 

consumer fans will increase in the first year after implementation because the fulfillment process is not

 

undergoing significant change. The consumer market is thought to be robust enough that growth can be

 

sustained for five years after which it will level off. There are no additional sales of either consumer or

 

industrial fans forecasted for years 6 and 7 of the project.

 

Industrial fans sell at a gross margin (price less cost of goods sold) of $800 per unit on average.

 

Consumer fans have a lower markup and only generate a gross margin of $150 per unit. To support

 

volume growth, plans are not to raise gross margins over the life of this project. They are forecast to

 

remain flat. Because consumer fans are distributed through a 3 rd party, there is an additional expense for

 

marketing and logistics of $50 per fan. Contracts with these third party distributors include fee increases

 

based on the rate of inflation each year.

 

Expense Reductions:

 

The significant streamlining of the fulfillment process will eliminate positions in the billing department

 

and warehouse. The CRM is also cloud-based, meaning less IT employees will be needed. In all, 15 fulltime positions would be eliminated as a result of moving to a CRM system. If an employee whose

 

position is eliminated cannot qualify for another open position at the company, they will be offered a

 

severance package which includes outplacement services. Big Breeze?s payroll costs for these positions,

 

including salaries, benefits and payroll burden, averages $60,000 per year. Payroll costs are also

 

expected to track inflation, so manpower savings will be worth more in the future.

 

Employees will be severed immediately as the new system comes on line. Severance is estimated to cost

 

60% of the total payroll costs saved in the first year of the project. Payouts are immediate and

 

outplacement is provided for 6 months after termination

 

YOUR ASSIGNMENT

 

Big Breeze?s CEO and special Committee of the Board want you to evaluate the study team?s findings and

 

calculate the project?s cash flows and economic returns to the company. They would like to know what

 

3

 

Big Breeze Business Case

 


 

the NPV, IRR, and Payback are for implementing a CRM. The CEO has set hurdle rates at 25% for all

 

capital projects. While Big Breeze has a WACC of 15%, the CEO only wants to consider projects that far

 

exceed WACC to guard against the risk of a slowdown in the overall economy which would hurt fan sales.

 

The CEO refers to this as ?Project A?.

 

The CEO also wants you to look at another variation of this project, ?Project B? which can generate even

 

greater savings, but which involves terminating more employees. She wants to make sure she

 

understands the difference in the economic impacts of both projects and selects the one that best serves

 

the stockholders without damaging the company?s culture and reputation as a fair employer.

 

Project B takes advantage of new system capabilities to outsource the remaining back office functions to

 

a 3rd party. Because of economies of scale of the outsourcer, it appears the cost of the fulfillment

 

process can be further significantly reduced by letting a 3 rd party perform warehousing, billing, and other

 

back office functions.

 

Project B Incremental Economics:

 

An additional 25 positions can be eliminated by moving these functions to a 3 rd party provider.

 

Therefore, project B results in termination of a total of 40 Big Breeze employees. Because these

 

additional employees include managers and other technical experts, their average salaries and benefits

 

are higher at $75,000 per employee. These salaries are also expected to rise with inflation.

 

Severance and outplacement continue to be estimated at 60% of the payroll costs saved. Not all 25

 

positions can be eliminated in the first year, however. In order to support a successful transition to the

 

3rd party provider, Big Breeze will need to hold onto 10 key employees during the first year after

 

implementation. In order to do this, Big Breeze will need to offer a retention bonus equivalent to 30% of

 

salary and benefits for each retained employee. At the end of that year, the retained employees will be

 

terminated and receive full severance benefits.

 

The third party provider will charge a flat fee of $1 million per year to perform the duties of these 25

 

people. The provider signs only 3 year contracts and the feasibility team estimates the rate will jump to

 

$1.1 million for years 4-6, and then $1.25 million for years 7 and beyond.

 

Analyze the economic returns of Project B, compare them to Project A, and present a business case

 

recommending the best course of action. The CEO and Board can move forward with one of these

 

projects or reject the idea of moving to a CRM and continue to do business as usual. The CEO and Board

 

are willing to consider other economic criteria, but they must know what the NPV, IRR, and Payback on

 

these projects are in order to accept the recommendation made in your business case.

 

It will be important that the Board knows you took into account the human resource issues associated

 

with these projects and weighed them appropriately. The Board is accountable to stockholders for this

 

decision and will need your business case to defend their actions.

 


 

4

 

Big Breeze Business Case

 


 

 


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