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GB519: Measurement and Decision Making
July 23, 2011
Unit 1 Case Study
A. What is the ROI for MIP based on original estimates? What is the ROI if Richard Lawrence's new revenue projections are used?
Return on investment based on original estimates = (net operating income/amount of investment)*100
Operating income= $25 million
Amount of investment=$140 million
Return on investment= ($25/$140)*100=17.85%
Return on investment (if Richard Lawrence's new revenue projections are used) =( revised operating income/amount of investment)*100
Operating income as per Richard= $17.5 million
Amount of investment=$140 million
ROI=($17.5/$140)*100=12.5%
B. Elaine feels pressure to deliver "good news" to Blake. What advice would you give to her? Given the possible personal financial rewards that Elaine may enjoy if GSM goes public, would your advice change?
Elaine has to convince Blake that newly developed MIP has lesser application to pharmaceutical industry than envisioned in the plan. The amount of income to be generated from the research is only $17.5 which is going to be lesser than the estimated $25 million. Elaine has to convince Blake that additional investment by way of public offering will not provide the expected return of 17.85%. Expectedly the payback period for this investment was to be 5.6 years ($140 million/$25 million), but the sales department believes it will take 8 years ($140 million/$17.5 million) for the company to recover its present cost of research. It would not be recommended to incur the additional cost for the return. There is a good chance that Elaine would enjoy the benefit of new issue of shares by way of stock options, she should not change her advice because she should always act ethical which is in the best interest of the company.
C. What responsibilities does Elaine have to other GSM employees, the board of directors, and the venture capitalists?
Elaine has the ethical and moral responsibility to GSM...