Biotech

1A. Should the LPG division spend $10 million on Equipment in 1974 or postpone some of this expenditure to 1977?

Discussion and Economic Assessment:

When evaluating the best alternative for Bio-Tech to maximize earnings per share, we believe the LPG division should invest $9.72 million on equipment in 1974. Included in this calculation is inflation from 1974 to 1975 of 8% and a 10% tax credit taken in 1975. Biotech should take advantage of the tax credit while it is guaranteed (as the political environment may change).

This decision also supports Bio-Tech’s strategic goal of doubling sales every 5 years and allows us the ability to reach future sales objectives while maintaining an aggressive growth strategy. In our sensitivity analysis, we modified the inflation rate and Weighted Average Cost of Capital (WACC) and concluded that even with a normalized inflation rate; it was not advantageous to delay the purchase of equipment.

A delay in the purchase of our capital equipment will potentially cost Bio-Tech an additional $1 million in a two year period. This assumes we have no known way of utilizing the funds in a more efficient manner.

1B. Risks

A. Purchase all Equipment in 1974

Risks:

• With the growth strategy of doubling every 5 years, LPG has to take risks and an aggressive approach. Their Board indicates they are willing to accept risk.

• If they purchase the equipment and the market goes down, LPG may lose market share and/or sales. Additionally, if the sales and marketing strategies do not allow LPG to capture more market share, LPG could have excess capacity and decreased revenue.

1C. Wait to Purchase Equipment until 1977

Risks:

• If Bio-Tech waits to purchase the equipment, the company may not be able to meet demand and may lose market share and revenue.

• If they wait to purchase equipment, tax credits may not be available.

• There is uncertainty of what the price of the equipment will be in two...