Decision sheetFlash memory Inc.Background:Small firm that specializes in the design and manufacture of solid state drives (SSDs) and memory modules for the computer and electronics industriesPresence in fastest growing segment of overall memory industryCompany is generating 80% of its revenue from memory businessFlash’s competitions include Intel, Samsung, Micron Technology, etc. Due to the products ‘characteristic and stiff competitors, its sales life cycle is short, usually only six yearsIn order to fix the risk of short life cycle, Flash aggressively spent on research and development to improve its existing product lines and add new onesWorking on a new product line and made a prototype by spending $400000 which is expected to generate max $28 million sales in 2012 as per sponsors’ prediction.Q1) what have I considered myself Ans. CFO of the companyQ2) what are the Central issues?Ans. Company is in dilemma in investing for new product line. The new product is believed to be better than all its existing products and is capable of enhancing cash flow and profitability of the company. Company has already spent $400,000 in new product line in last nine years and new product is believed to generate sales of at least $21.6 million in 2011 and $28 million in 2012 and 2013, before falling off to $11 million in 2014 and $5 million in 2015. New plant and equipment required for new product costing $2.2 million must be purchased, and this specific equipment would be depreciated straight-line to zero salvage value over its five-year life.
The central issue in the case is that company is considering expanding its business operations but for that the company is in need of the financing. Hathaway Browne, the Chief Financial Officer of the company wanted to analyze the future aspect of the investment and financing requirements for the expansion as the company was not growing with stable pace. The high market competition and rapid growth attracted the big giant of the other market to enter into this market segment, which created problems for Flash Memory Inc. in terms of reducing its profit margins and it also affected its working capital requirements, which lowered its investment capacity and also worsen Flash Memory Inc.’s financial position in the marketQ3) what are various alternatives available to fix issues?Ans. CFO of the company is responsible for investment and financing decision of the firm. Cost of financing will depend on the cost of equity and cost of debt and investment decision is depend on the financing option will depend on the NPV and IRR value and cash flow. Initially we are having only two options which are, either to invest in new product line or not. For this we have to analyse expected cash flow. Analysis of various options: