a simple business case for very large format offset

A Business Case:

Wide Format Sheet FedOffset Acquisition

An Operations Management Analysis for the Graphic ArtsRochester Institute of Technology

Nick D. BarzelayMay, 2007

May 14, 2007 Operations Management for the Graphic ArtsCopyright © 2007 Nick D. Barzelay. All Rights Reserved.

2

Approach

Reason for acquiring VLF offset capabilities Business model parameters Business model constraints Capital considerations Cash flow considerations Investment analysis Conclusions


3

Acquisition Reasons

Manufacturer’s Objective: facilitate existingprinters entering into new markets with aneconomical, reliable, efficient, unique solution

Aligned Customer Objectives: Diversification & entry into new markets Market differentiation & flexibility Single sources “under one roof” supplier Efficiency & cost savings Quality, speed, & consistency


4

Model Parameters

1. Equipment cost (including delivery,installation, & training) $ 7,952,000.00

2. Payback - 3 years (mandatory)3. Financing - 3 year note at 8.25% (wsj

prime) compounded annually4. Operations - 3 shifts at 40 hours/week/shift5. Revenue - operational costs + 10% margin


5

Model Constraints Site preparation & auxiliary equipment -

not included; company situations & regionaleconomics will affect costs & requirements

Financing - example only; company & regionalconditions will affect terms

Revenue - Sales flat lined for investment focus Depreciation - 15% to accommodate 3-shift

operation (NAPL recommendation) Productivity - does not affect investment

performance as modeled (effect on sales &value added)


6

Invested Capital &Repayment Amortization

Principal 7,952,000

Interest 1,346,715

Total Note 9,298,715

Period Beginning Balance

Principal Payment

Interest Payment

Total Payment

Ending Balance

Year 1 9,298,715 2,443,532 656,040 3,099,572 6,199,143

Year 2 6,199,143 2,645,123 454,449 3,099,572 3,099,571

Year 3 3,099,571 2,863,345 236,226 3,099,571 -


7

Cash Flow from Operations

Year 1 Year 2 Year 3 Year 4 Years 5 - 7 Total Flows

Fixed Costs 1,231,108 1,231,108 1,231,108 1,231,108 3,693,324 8,617,756

Variable Costs 798,682 798,682 798,682 798,682 2,396,046 5,590,774

Overhead: Sales & Admin. 649,533 649,533 649,533 649,533 1,948,599 4,546,731

Total Operating Costs 2,679,323 2,679,323 2,679,323 2,679,323 8,037,969 18,755,261

Note Repayment 3,099,572 3,099,572 3,099,571 - - 9,298,715

Total Annual Outlays 5,778,895 5,778,895 5,778,894 2,679,323 8,037,969 28,053,976

Revenue Requirement 5,778,895 5,778,895 5,778,894 5,778,894 17,336,682 40,452,260

Marginal Profit 577,890 577,890 577,889 577,889 1,733,667 4,045,225

Total Revenue 6,356,785 6,356,785 6,356,783 6,356,783 19,070,349 44,497,485

Net Income 577,890 577,890 577,889 3,677,460 11,032,380 16,443,509


8

Investment Analysis ROI (how well net income covers invested

capital) = 177% Capital Turnover (how well sales cover

invested capital) = 479% Net Income % of Sales (the relationship of

net income to sales) = 37% NPV (net positive & negative cash flows

compared to a similar investment) =$ 1,012,904.00 better than investment


9

Conclusions

Not a cure for a weak or failing company

Strong creative sales capabilities needed

Healthy customer base required(both current & potential)

Financial health must be good

Operational health must be good