Download Cranfield Case 1 Assignment

MBAD/F 619 - Summer 2010
Dr. Leon
CASE 1: Cranfield, Inc. Case
Case 1 is a risk analysis of the Cranfield Inc. case presented in cases 12A and 13A on
MyLMUConnect’s Assignment tab. Your assignment is to recommend to Maria Lopez and
Robert Walker whether or not the lite cranapple cocktail project should be accepted or not.
Preparation of your recommendation should involve the following issues and analysis:
1. Complete the INPUT and CASHFLOW worksheets in CRANCASE.XLS based on the initial
set of assumptions discussed in the case and in class. Refer to Table 1 of case 13A to help
validate your model.
2. Select two output variables that you would like to analyze for your decision. Identify the
criteria you have for these variables with respect to classifying the project as acceptable or
not. Be prepared to defend your choice of criteria in the executive summary.
3. Assuming a +/- 30% deviation, use data tables to perform a sensitivity analysis of your
output variables from part 2 to each of the following input assumptions:

Unit Sales

Salvage Value

T=0 Sales Price

T=0 Variable Cost

Price Inflation %

Cost Inflation %
Create a spider diagram for each of your two output variables that shows the impact different
input values will have on that corresponding output. Do the values tested for each input seem
plausible based on market experience and information from the case? Create a data table for
each input assumption that examines what your output variables could be in a worst case/
most likely case/best case scenario. Attach notes in the first column of these data tables
explaining why you picked these possible worst/best cases. Create a spider diagram for each
of your two output variables that shows the impact these different input values will have on
that corresponding output. Save the file with your sensitivity results and spider diagrams in a
file named Case1A.xls.
4. Copy the INPUT and CASHFLOW worksheets without the data tables and spider diagrams
to a new spreadsheet file. Based on your results from parts 2 & 3, which three input
assumptions do you think are the most important and should be studied further? Attach cell
notes for these identified input variables that describe and defend the risk distributions you
are going to use for these inputs in your simulation.
5. Using the 10% cost of capital assumption from case 12A, perform a simulation of 1000
iterations with your input distributions specified in part 4 and calculate the descriptive
summary statistics for your output variables. (You do not need to calculate histograms for
this part). In the spreadsheet, calculate a 95% confidence interval for the expected value of
each output variable and for the probability of achieving the criteria you defined in part 2 for
accepting the project. Do you think 1000 iterations are sufficient to make your
recommendation? In your spreadsheet model, attach a cellnote explaining why or why not.
Name this worksheet PreliminaryStats.
6. What is the coefficient of variation for NPV? Is this a high risk, average risk or low risk
project for Cranfield, Inc.? Refer to Case 13A to see if your simulation results were
generated using an appropriate cost of capital for the project’s risk. Rerun your simulation
with the appropriate cost of capital as defined by Case 13A’s guidelines and a sufficient
number of iterations on a worksheet called FinalStats. In a textbox, clearly identify the cost
of capital you decided to use and defend why you picked this cost of capital and number of
iterations.
7. On the FinalStats worksheet, describe the possible values for your output variables with
descriptive statistics, histograms and the probability of achieving the criteria defined in Part
2. Save your simulation model and results from parts 4 to 7 in a file named Case1B.xls.
8. Based on your findings in part 7, what is your recommendation to Maria and Robert? Should
Cranfield accept or reject the lite cranapple cocktail project?
9. During class, turn in a 1 page (hard-copy) executive summary for Maria and Robert that
presents your recommendation. You must use standard 1 inch margins and 12 point font.
This written analysis should communicate the criteria you defined in part 2 along with the
cost of capital that you identified as appropriate for the project. It should also present your
recommendation for the project and support your recommendation by concisely and clearly
communicating and interpreting the KEY output results from your analysis in part 7.
Deposit your two spreadsheet files in the assignment section of MyLMUConnect.
CASE EVALUATION SCORE SHEET:
TOPIC
POINTS
POSSIBLE
MODEL
Input Assumptions
5
Valid Cash Flow Model
15
SENSITIVITY ANALYSIS
Data Tables
12
Spider Diagrams
8
Evaluation of Input Ranges (cellnotes)
4
RISK ANALYSIS
Explanation of Input Distributions
Modeled (cellnotes)
9
Simulation Runs Performed Correctly
6
Descriptive Statistics Generated
12
Convergence Addressed for Iterations
8
DECISION RECOMMENDATION
21 (see rubric)
TOTAL: 100 points
CASE 1 CRANFIELD INC. SIMULATION RUBRIC
Points
3
2
Organization
Evaluation Criteria
Your memo is
clearly and
efficiently
organized. After
reading the first
paragraph, the
audience knows
your general
recommendation
and the criteria
on which you
based your
decision.
Portions of the
memo ramble
and/or the first
paragraph does
not summarize
the decision
criteria and
recommended
plan for the
audience.
Appropriate criteria
are used to evaluate
the project. The
justifications for
these criteria are
clearly and
correctly stated.
Appropriate criteria
are used to evaluate
the project. The
justifications for
one or more of
these criteria are
not clearly stated or
are incorrectly
stated.
Assessment of Project
Risk (Points x 2)
The inherent risk of
the project is correctly
assessed and an
appropriate cost of
capital is used to
determine the output
results for the risk
analysis arguments.
Writing
Mechanics
Your memo is
substantially
free from errors
of grammar,
word usage,
punctuation and
spelling.
Risk Analysis Arguments
(Points x 2)
*Easy to read tables or graphs
summarize the simulation results
in a meaningful managerial
context.
*You clearly communicate only
key information about expected
outcomes as well as the
associated risk.
The inherent risk of
the project is
incorrectly assessed
and thus an
inappropriate cost of
capital is used to
determine the output
results for the risk
analysis arguments.
Your memo has
a few errors of
grammar, word
usage,
punctuation and
spelling, but
they do not
distract the
reader to a
significant
degree.
*Easy to read tables or graphs
with minor problems summarize
the simulation results and/or
*You clearly communicate key
information about expected
outcomes, but fail to fully
identify the associated risk.
Points
Organization
Only one
appropriate
criterion is used
to evaluate the
project.
1
Your memo
jumps from idea
to idea without
a clear reason
for moving in
that direction.
Your memo
does not
summarize the
information for
the appropriate
audience.
*Inappropriate
criteria are used
to evaluate the
project or
*There are no
criteria stated
for the analysis
0
Points
Earned:
Points
Possible:
3
Evaluation Criteria
3
Assessment of Project
Risk (Points x 2)
The inherent risk of
the project is
correctly assessed but
an inappropriate cost
of capital is used to
determine the output
results for the risk
analysis arguments.
The inherent risk of
the project is not
assessed and the risk
analysis arguments
are based on the
preliminary
simulation output.
6
Writing
Mechanics
Your memo has
an accumulation
of errors of
grammar, word
usage,
punctuation and
spelling that
distracts the
reader from the
points you are
trying to make.
Your memo is
marred by many
and serious
errors of
grammar, word
usage,
punctuation and
spelling
Risk Analysis Arguments
(Points x 2)
*Key quantitative results are
communicated inaccurately or
incompletely, thereby misleading
the audience in its final decision.
*Inappropriate outputs are
included in the memo, thereby
confusing the audience about the
key results.
3
6
*Most of the quantitative results
of your analysis are not directly
communicated in any meaningful
form, thereby resulting in
obscure or inaccurate evaluation
of the project that provides no
real support for your
recommendation.