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Investment in Wee Infant Milk Formula: A Capital Budgeting Dilemma

CASELET, FINANCIAL MANAGEMENT
ET Cases, 7 Pages
AUTHOR(S) : Aarti Sharma, Assistant Professor and Kirtika Malhotra, Assistant Professor – IILM Institute for Higher Education

Case Preview

Investment in Wee Infant Milk Formula: A Capital Budgeting Dilemma

On 15 September 2018, Dr. Krishnan just finished reading the report submitted by Murthy, the Product Manager of Neophyte India Pvt. Ltd., regarding investment in a new product line, "Wee Infant Milk Formula". The conception of the said new product line came into picture 2 months ago when Dr. Krishnan started following the news and research reports on growing demand for baby food and infant formula in India.

Like every learned citizen of India, Dr. Krishnan was well aware of the issue of malnutrition and infant mortality rate in India. India is one of the highest ranking countries in the world for number of children suffering from malnutrition. He thought of bringing together the growing acceptance of infant milk formula with increasing number of malnourished children in India. The proposed product is intended to meet the nutrition requirements of infants (0-12 months) in addition to the mother's milk.

Dr. Krishnan discussed the idea of this infant milk formula with Murthy and his team. Murthy liked the idea and wanted that a market research should be conducted before the company invests in this new product especially when the company has never moved beyond the existing product line of processed baby food.

Company Background

Started as a small business in 2004 by Dr. G V Krishnan (Dr. Krishnan), as an initiative to serve the feeding needs of a baby with maximum natural benefits, Neophyte India Pvt. Ltd. is a leading FBO (Food & Beverage Organization) in Bengaluru, India by August 2018. It has secured a considerable share in the baby food market by offering packaged organic baby food for toddlers (1-3 years). The organization was registered under Companies Act, 1956 as a Private Limited company from 2006 onwards and incorporates both manufacturing and retailing of the said product. Dr. Krishnan is a voluntarily retired pediatrician from a well-known private hospital in Bengaluru. During the years of his practice, Dr. Krishnan learnt that irrespective of their economic status, people in India embraced the baby food. Thus the level of adoption of commercial baby food has considerably increased in India and would continue. One of the major reasons behind its quick adoption is the convenience offered by the product to the busy parents who have time constraints........

The Proposal

Dr. Krishnan strongly believed that adequate demand for any new product and the availability of ample amount of financial resources are the keys behind the success of any proposed investment plan. Reading the executive summary of the proposal submitted by Murthy, Dr. Krishnan was reminded of his conviction. With regard to the financial resources, Dr. Krishnan felt that there could not be a better timing to consider such an investment. On account of increasing sales trend and high profitability levels over the past few years, Neophyte had saved sizable amount of funds. In the proposal, Murthy estimated that 80% of such a required capital could be funded by equity and the remaining 20% could be debt-financed, for which the company was required to approach the banker.............

Assignment Questions

I. What are the relevant cash flows that should be considered by Dr. Krishnan for the proposal in hand?

II. How should the following be treated, while taking the capital budgeting decision of such a low-priced product line?

a) Cost of the market survey
b)........

Exhibits

Exhibit I: Neophyte India Pvt. Ltd.’s Annual Sales

Teaching Note Preview

Investment in Wee Infant Milk Formula: A Capital Budgeting Dilemma

Synopsis

Dr. G V Krishnan (Dr. Krishnan), the founder of Neophyte India Pvt. Ltd., a private-label processed baby food manufacturing company based in Bengaluru, was considering investment in a new product line i.e. Wee infant milk formula. This was a major capital investment decision that Dr. Krishnan had to take as the company never moved beyond the existing processed baby food product line. A market study was conducted to identify the potential market size, costs and expected cash inflows associated with this new product line. Through this study he wanted to analyze the value addition the intended capital investment will bring to his existing business. Further, he wanted to know if this new product line will cause any erosion to the sale of existing product.

Prerequisite Conceptual Understandings/Before the Classroom Discussion

Students/participants are expected to read the topics on capital budgeting decisions, discounted and nondiscounted cash flow techniques from the following:

• Chandra P., Financial Management Theory and Practice, Mcgraw Hill Education, 2015, ISBN: 9789339222574, 9339222571

• Ross S. A., Westerfield R. W. and Jordan B. D., Fundamentals of Corporate Finance, Tata McGraw Hill, 9th Edition, 2012, ISBN: 1259027627

Case Positioning and Setting

This case can be used in basic finance modules at both undergraduate and post-graduate levels. Through this case the students will assume the role of the financial manager of Neophyte India Pvt. Ltd. and assist Dr. Krishnan in the decision of investing in the infant formula product line. Students will be required to project future cash flows and apply capital budgeting techniques to ascertain the feasibility of investing in Wee infant formula.

Expected Learning Outcomes

The learning outcomes would enhance students’ understanding the following areas:

• Project future cash flows
• Apply capital budgeting techniques
• Analyze feasibility of a particular investment decision

Assignment Questions

Students are expected to answer the following questions assuming themselves as the financial manager of Neophyte India Pvt. Ltd.

I. What cash flows would be relevant for Dr G V Krishnan regarding the proposal in hand?

II. How should the following be treated, while taking the capital budgeting decision of Wee infant formula?

Exhibits

Exhibit (TN)-I: Classroom Discussion Dashboard

Exhibit (TN)-II: Case Facts

Exhibit (TN)-III: Cash Flow Projections

Exhibit (TN)-IV: Discounted Cash Flow (DCF) and Non-Discounted Cash Flow (NDCF) Analysis

 

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Abstract

Dr. G V Krishnan (Dr. Krishnan), the founder of Neophyte India Pvt. Ltd., a private-label processed baby food manufacturing company based in Bengaluru, was considering investment in a new product line i.e., Wee infant milk formula. This was a major capital investment decision that Dr. Krishnan had to take as the company never moved beyond the existing processed baby food product line. A market study was conducted to identify the potential market size, costs and expected cash inflows associated with this new product line. Through this study, he wanted to analyze the value addition the intended capital investment would bring to his existing business. Further, he wanted to know if this new product line will cause any erosion to the sales of the existing product. This case can be used in basic finance modules at both undergraduate and post-graduate levels. Through this case, the students will assume the role of the financial manager of Neophyte India Pvt. Ltd. and assist Dr. Krishnan in the decision of investing in the infant milk formula product line. Students will be required to project future cash flows and apply capital budgeting techniques to ascertain the feasibility of investing in the new product line, Wee infant milk formula.

Pedagogical Objectives

  • To enable students project future cash flows
  • To enable students to apply capital budgeting techniques
  • To enable students analyze feasibility of a particular investment decision

Case Positioning and Setting

This case can be used in basic finance courses such as Corporate Finance, Financial Management, etc. in Capital Budgeting module at both undergraduate and post-graduate levels.



This Case Pack Includes:
- Abstract
- Caselet
- Teaching Note (**ONLY for Academicians)
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