FINANCE FOR MANAGERS

Finance for Managers



Case: Spray-and-go Pharmaceuticals PLC

Introduction

When the product concept is clear managers must analyze whether it is feasible for the company and under what conditions. It is necessary to evaluate the capabilities of all areas of the organization to help develop the new product or service: economic and financial (resources), production (manufacturing systems, tooling, molds, external suppliers, materials) commercial network (price, point of sale, promotion and advertising) logistics (storage and transport).

This paper analyzed the new product viability for the senior manager for the purpose of proposed production of the new product.

Overview of the company

Spray-and-go Pharmaceuticals is a medium sized company based in the UK. It manufactures a range of travel related pharmaceutical products for sale to major supermarket and retail pharmacy chains in the UK. Spray-and-go is a successful and profitable company. Profit before tax for the most recent financial year was £2 million. The majority of its senior management team are however fairly risk averse. The company has just completed widespread product and market research into a new mosquito spray at a cost of £150,000. On the basis of this research it is now considering launching a spray product, “Repulsit”.

Factors to be successful in the industry

The industry provides a range of services, the majority of which include extermination services for mosquitoes, rodents, termites, bed bugs, cockroaches, ants, flies, ticks, fleas, wasps and spiders. This industry also offers containment services for birds such as pigeons, woodpeckers and European starlings. Larger operators also offer building maintenance services, landscaping care and maintenance and lawn and garden services. The value of sales for each service depends on demand factors and prices for extermination and containment services.

Mosquito Eradication Services

Mosquitoes represent serious health threats as they carry diseases such as malaria, West Nile, yellow fever and dengue-hemorrhagic fever. In UK, encephalitis and dog heartworm are the primary mosquito-borne diseases, but dengue has recently crossed into few areas of UK. Mosquito-borne encephalitis is prevalent in several forms; for example, in leads, Manchester, and other cities of UK, viral strains were the most common before the invasion of the West UK Virus in 2002. Mosquito eradication services involve applying insecticides directly to water to control mosquito larvae, removing standing water or spraying pesticides by aircraft or on the ground using truck-mounted sprayers. Revenue from mosquito eradication is estimated to make up 4.0% of the industry's total.

Demand Determinants

Demand for mosquito spray is affected by federal, state and local regulations, weather conditions, downstream demand from food establishments and accommodation services, housing sales and consumer and business preferences. The majority of mosquito spray elimination and containment services are necessary expenditures for businesses and consumers, so demand was not entirely constrained by the recession. Nevertheless, a greater percentage of consumers pursued mosquito spray extermination methods themselves during the recession, which caused industry revenue to decelerate.

Hence, undiscounted cash flow makes the assets appear to have equal economic values because this method ignores timing and uncertainty.

Calculations and Analysis

The Expected Cash Flow Approach

Annual demand

500,000 units

 

£

Unit ...