기업분석#(The Jacobs Division 2010)

Statement of Problem

 

 The Jacobs division designed to the Silicone-X project. The problem is that the company has to choose between the labor-intensive project and the capital-intensive project for Silicone-X project in order to obtain higher return from the project.

Analysis of Problem

 

 Between the two projects, which are labor-intensive and capital-intensive alternatives for Silicone-X, in order to find which project is more appropriate to company, Richard Soderage needs to decide the net present value (NPV) and the internal rate of return (IRR) of the labor-intensive project and the capital intensive project, respectively. In order to calculate the NPV and the IRR, the discount rate is needed. The Jacobs division uses the weight average cost of capital (WACC) as the discount rate. The discount rate is changed during the first few years because in the beginning, the Silicon-X project had imperfect factors. For example, there was no patent protection on the Silicon X project so competitors could easily obtain the technology of Jacobs division. In the end, the discount rate increases during the first few years. In the labor-intensive project, the discount rate started at 10% and increased an average of 0.5 percent at 5 years.

 

After 5 years, the discount rate was fixed at 12%. Through the free cash flow and discount rate, the NPV is equal to $724 million and the IRR is equal to 21% in the labor-intensive project. On the other hand, the capital-intensive method increases a wide width of the discount rate than the labor-intensive project because the capital-intensive project largely invests their outlay in the beginning than the labor-intensive project. The discount rate in the capital-intensive project is equal to 10% and increase an average of 1 percent at 7 years. After 7 years, the discount rate is fixed at 16%. In the end, the NPV is equal to $345 million and the IRR is equal to 17% in the capital-intensive project. In comparing between the labor-intensive project and capital-intensive project, So Soderage has to choose the labor-intensive because the NPV and the IRR of the labor-intensive project is bigger than the NPV and the IRR of the capital-intensive project.

 

 There are some advantages and disadvantages between the labor-intensive project and the capital-intensive project. First of all, the labor intensive advantage is that the Silicon-X can be on the market faster than the capital-intensive option because start-up costs are lower than the capital-intensive project with labor cost is $0.9 million compared to $3.3 million for using the capital-intensive option. Another advantage of the labor-intensive project is that many the unemployed can obtain employment by which unemployment problem is solved. However, the drawback of the labor-intensive project is that it needs to increase costs for managing high demand. The advantages of capital-intensive are that cost per unit and fixed costs are lower than labor-intensive. Specifically, total variable cost per unit is $1.15 in the capital-intensive option compared to $1.40 in the labor-intensive option. The fixed cost except depreciation in the capital-intensive option equal to $110 million is also lower than labor-intensive option for $210 million. The disadvantage of capital-intensive option is that it needs higher initial cost than labor-intensive project which means that it takes more time to get profit.

 

 Another way to evaluate the labor-intensive and the capital-intensive project is the breakeven analysis. The breakeven analysis shows how many units should be sold to make a profit to company. Specifically, the profit will exist when the company’s sale exceed total cost. In the labor-intensive project, the variable cost per unit is $1.40 which is higher than the variable cost of the capital-intensive project, which is equal to $1.15. When sales price per unit is $1.90, the contribution per unit is $0.5. In the end, when sales per unit are equal to $1.90, the breakeven is $540,000 in the labor-intensive project and is $369,333 in the capital-intensive project. However, when the sales price per unit decrease from $1.90 to $1.70, the breakeven is $900,000 in the labor-intensive project and is $503,636. The breakeven point of labor-intensive project rapidly increases when the price is cut.

  In comparing between the labor-intensive and the capital-intensive, the capital-intensive option has better breakeven than the labor-intensive option. However, the breakeven analysis has a problem to evaluating the labor-intensive project and the capital-intensive project because the breakeven analysis depends on sales per unit. If sales per unit decrease, breakeven point increases even though the capital-intensive project has better breakeven point than the labor-intensive project. In the end, the method that evaluates the NPV and the IRR of two projects is preferred than the breakeven analysis method. So, the labor-intensive project is proper than the capital-intensive projects according to the NPV and the IRR.  

 

Recommendation

 

 The Jacobs division should choose the labor-intensive project rather than the capital-intensive project. Through comparison the net present value (NPV) and internal rate of return (IRR), Richard Soderage who is financial analyst for the Jacobs division can choose the project. The NPV of labor-intensive project is $724 million and the NPV of capital-intensive project is equal to $345 million. The IRR is 21% in labor-intensive project and The IRR is 17% in capital-intensive project. The labor-intensive project has better NPV and IRR than the capital-intensive project. In the end, Soderage has to choose the labor-intensive method.