Saturn Module Ii Case Analysis
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Cash Flow Analysis of Saturn’s Five Options
Saturn has five options to choose from, each leading to different performance levels as shown on the income and cash flow statements. Selecting expansion at Spring Hill at full scale production is the optimal option, when basing the decision criteria purely on cash flow analysis. Spring Hill at full scale production leads to an overall net present value of $227,191,496. This value is $23,615,796 greater than the next best financial option (Willow Run). Spring Hill at full scale production is also considerably better from a cash flow perspective compared to sourcing from a GM plant (NPV overall = $114,872,764) and choosing to run Spring Hill at low scale production (NPV overall = $92,659,914). Since each of these four aforementioned options leads to a positive net present value overall, they can all be deemed acceptable. Spring Hill at full scale simply stands out as the most favorable among these four. The fifth option, Bowling Green, leads to a negative overall net present value of -$230,759,517. Therefore, choosing this option is an unacceptable scenario. It is better off to delay expansion completely, at no incremental costs (and no incremental revenue), than pursue a financially detrimental expansion project such as Bowling Green. Once again, our cash flow analysis of each option concludes that opting for the Spring Hill at full scale production scenario is the optimal choice.
Scenario Analysis
It is unrealistic to expect 100% unit sales per year for the expansion project for Saturn. While the company does expect Saturn to do well, there are always unknown factors that can affect sales and it is best to remain conservative when projecting sales. Therefore, we lowered the unit sales in order to account for this. We did a sensitivity analysis to see what would happen under a variety of conditions. When we lowered sales by 50% per year, the NPV of our optimal decision, full scale expansion at Spring Hill, becomes negative at -$273,970,953. Actually, the NPV’s for each option become negative, and the best choice is to delay expansion. Less conservative sales projections yield different results. By lowering unit sales by 25% per year, sourcing models from another GM plant becomes the only option that does not yield a negative NPV at $45,780,983, and is therefore the optimal decision. However, if we lower projected sales by only 10%, full scale expansion (our optimal decision) remains the best decision with a NPV of $126,959,006, while the second choice decision would be to convert the existing factory at Willow Run, with a NPV of $110,011,086.
By changing the sales figures to more conservative numbers based on lowering unit sales by 50%, 25%, and 10%, we can see that the optimal decision remains full scale expansion at Spring Hill for a small decrease in sales units, for example 10%, but becomes sourcing models from another GM plant if the actual sales units are substantially lower than the projected sales units, for example 25%. Because of this, it becomes very important to accurately project sales units for Saturn. We believe that GM should expect sales units to be only slightly lower than 100% due to the success that Saturn has been experiencing of late. According to the case, “Saturn’s managers believed that the Spring Hill complex would be running near capacity levels during the late summer and fallвЂ¦Ð²Ð‚Ñœ(27). Furthermore, increasing economies of scale through expansion would increase sales and production while lowering costs for the company. Based on this information, we believe that full scale expansion at Spring Hill remains the optimal decision.
Strategic Analysis