Background of the case: HGS, a Specialty chemical firm, is deciding whether they will invest

in Plastiwear-a new technology that can make shirts look expensive but costs very little to

manufacture. The management team of the company has been evaluating the investment

potentials for a long time. However, they could not come to a decision yet. Justin Campbell, a

newly appointed employee at HGS, is working in a team entrusted with the diagnosis of

launching decision of clients new products. Justin along with Gordon, Vivek and Bill team up to

oversee the Plastiwear project at a Hotel. The case begins with Justins first day experience in

HGS meeting and continues with the explanation of his experience related to purchasing criteria,

market segmentation and a thorough analysis of NPV dilemma. This case explains the market

segmentation and purchasing criteria by using Justins own experience during his stay at Hotel.

The accidental coffee spill over his only shirt made him think about buying a new shirt as he had

an appointment with the CFO of HGS in afternoon. Being an inexperienced shopper of white

dress shirt, Justin researched into the varieties of shirts on the internet. Justin, as a consumer,

falls into a particular segment that needs white dress shirts, usually costly and worn by

executives. Justin set up his own purchasing criteria and evaluated a number of shirts at a shop.

While buying his shirts, he discovered that he could wear the plastiwear shirt instead of a $400

white shirts, both looking similar in design. He thought that if the plastiwear felt and wore as

well as the top-end shirt, he would definitely go for the plastiwear. This experience makes him

dig deeper into the reports of Plastiwear already made in HGS. He reviewed all the six reports on

present value of the projected cash flows from the investment in plastiwear. He found some

significant variations among the reports, making him puzzled for a while. His inquisitiveness

regarding the case pulls out some important facts about the strategic decisions and influence of

corporate politics and situations on those decisions. Justins interview with the CFO points out
the facts regarding the NPV calculations in real world and NPV calculations taught in MBA

program at Business School.

The Problem: HGS faces dilemma in launching its innovative new products-Plastiwear in the

market. This patented new product, despite having amazing potentiality, receives mixed reviews

from different concerned management teams. A thorough analysis of the reports on NPV of Cash

flows that plastiwear white shirts would generate are confusing to the concerned people. The

delay in making decision can partly be attributed to managers not coming into a consensus. The

six reports calculated present value of future cash flow from Plastiwear investment. Surprisingly,

the six reports generated different results with significant differences. Two of the reports, termed

as optimistic, concluded it would generate almost $1 billion in present value; another couple of

reports, termed as pessimistic, concluded it would destroy almost $1 billion in present value. And

the other two, termed as middle of the road, concluded it would about break even for HGS-a

positive present value of $100,000 for one of the year reports, a negative present value of

$60,000.

The huge discrepancy in the reports results make it harder to choose the best one. Moreover, the

CFO, despite being well aware of the NPV facts, doesnt have the answer to the question about

the best NPV among the six.

The Analysis: A closer look at the NPV calculation shows that all the six reports followed the

same method to calculate the NPV. However, due to the variations in assumptions and strategies,

the final result vary. At first the nature of the product was defined as the strategies are different

for new product and new product extensions. Depending on the nature of the products, the future

cash flows from the investment is projected and then discounted it back to the present value.
The quantitative reasons for the variations in optimistic, pessimistic and break even report are the

following.

Building Costs Marketing Expenses Discount Rate

Optimistic outcome <$3.5 million insignificant 7.5%
Pessimistic outcome >$28 million $30 Million around 24.5/26%
Middle of the road $3.5<X<$2.8 Million moderate 14/15%

Seemingly, the three different outcomes are the result of different assumptions in order to test

how sensitive the outcome is to the varying market shocks. However, the sensitivity analysis has

already been done in each of the independent report. The surprising fact about sensitivity

analysis is that the test was done independently not centrally, raising the question to its overall

sensitivity analysis. As every report independently did sensitivity analysis, the question remains

why the independent reports would generate significantly different result.

A further look at the case reveals other reasons why pessimistic and optimistic reports are

different.

a. The optimist see Plastiwear as an extension of current business whereas pessimist see the

product as a completely new product. The extension products usually do not have

significant building costs. Besides, the extension products require less marketing

expenses. Pessimistic calculation assumes a $30 million marketing expenses, making a

huge difference in NPV.

b. The future cash flow of extension products can be projected more accurately than a cash

flow from a radical technology. Cash flow estimation for new product is very tricky as

both company has no knowledge on customers choice. It is difficult to assume

customers choice as customers often have no idea about the product.

 c. Optimists assumed that they can use some excess manufacturing capacity in the

packaging division. On the other hand pessimist assumed that company would have to

build a new plant, deal with attendant environmental issues, and so forth.
d. Discount rate for radical technology is usually higher as it is uncertain and very tricky to

determine. Pessimist assumed a very higher discount rate of 24.5/26%, making the NPV

amount significantly lower than one generated by Optimistic discount rate of 7.5%.
e. Managerial biases also account for the variations in the outcomes. There is a

disagreement among the managers whether they should launch the Plastiwear in the

market. The team that developed the plastiwear is in favor of optimistic report and

thereby want to launch the product; however, team that reports to VP of oil and gas does

not think so. They see plastiwear as a distraction. They assumed that plastiwear would

likely reduce capital spent on expanding his division.

f. Although NPV can be a means for managers to manipulate information to further their

careers, the CFO is not quite sure whether it is actually being manipulated as all the

teams backed their outcomes with reasons and data.

The Solution: The investment decision only based on the NPV is not a wise one. NPV can be

influenced by managerial biases. Besides, for a radically new product, the projected cash flows,

discount rates and market shocks cannot be determined confidently.

Based on the judgment and case explanation, it is clear that plastiwear product is a radically new

product. For extension of current products lines, company usually use past experience to invest

in sales and marketing, plant and equipment and others. However, it is not possible to use past

experience for radically new product. Before determining the discount rate and projected cash

flows we suggest to use porters five forces model to evaluate the investment potential and

profitability of the company.

The proposed Porters Fiver Forces Model:

 Threat of New entry: medium

Is it important to
protect the patent.
How easy is it to copy
this and produce a
similar one.

Threat of Buyer Power: High Threat of substitutes: Threat of Supplier power:

Medium High
Wide variety of
choices. Price is cheaper than Very narrow and niche
Sensitivity to the similar white shirt. market.
chemicals. Availability of Concentrated supplies.
alternatives.
No substitute to high

Industry Rivalry: High

Quality differences.
Switching costs.
Customer loyalty.
Huge number of
competitors

Based on the porters Five forces model, we can decide upon the assumptions for NPV

calculations. There is a medium entry barrier as the product is patented. Besides, a radically new

products such as plastiwear is not easy to copy. However, the threats of new entry should be

taken seriously as it is not highly unlikely to get replica in the market.

Industry rivalry is very high as there are switching cost for the customers. Loyal customers of

existing brands will not easily switch to Plastiwear. Besides, customers preference to quality

may overturn the entire market.

There are threats of substitutes products. Although not very high, the threat arises due to the

available alternatives. However, due to cheaper prices the company will face medium threat.
Buyer power and supplier power are both very high. Buyers are sometimes sensitive to

chemicals and may turn away from pastiwear. Suppliers also can push pressure on the company

as the product depends on concentrated suppliers.

Based on the analysis, the Cash flow projections should be somewhere between optimistic and

pessimistic outcome. The middle of the road outcome is probably the most appropriate for

plastiwear. Due to its innovative nature, plastiwear is expected to at least break even at the

discount rate of 14-15%. However, choosing (specific approach)

Recommendations: The following recommendations can be considered for a clear

understanding of Plastiwear investment potential.

a. Market for plastiwear is very niche, a substitute for a $400 white dress shirt. A

demographic segmentation that considers age, income and Gender can be applied to

plastiwear marketing. The Target customers for plastiwear are those who are in need of

cheaper professional white dress shirt.

b. The team entrusted with overseeing the new product launch can be utilized properly.

Justin can discuss the NPV variations with other members of the team. Bill and Gordon

are both very experienced in this field. They can be utilized to understand the NPV and

contribute to the decision making.

c. An independent third party can be employed temporarily for an impartial report on NPV

and investment potential.

d. A coordination among the different management teams within the organization is needed.

This can help minimize the managerial biases in making reports.

e. Apart from creating multiple NPV calculations, one report can be created centrally with

sensitivity analysis.
f. HGS can do some test marketing by launching the Plastiwear on a test basis to see the

customer reactions to this. If the test result is favorable, HGS can think of long run

production.
 g. The company should also analyze the strengths, weakness, opportunities and threats

before they assume costs and discount rate for NPV calculation.

Conclusions: Based on the information given in the case, It is difficult to come to a decision

whether Plastiwear should be in market. NPV calculation is not the only measure to evaluate an

investment potential. HGS can also think of investment rate of return(IRR) method or adjusted

IRR method. Projected customer lifetime value(CLV), although very new concept, is getting

popular for investment decision. However, calculation of expected returns is dependent on the

assumptions, strategies, and other managerial factors.