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Jacob division case

1.If you were Mr. Soderberg, would you recommend that Mr. Reynolds accept the
Silicone-X project? If not, why not?

To figure out that Mr. Soderberg should accept this project there are a few
important standards that must be met. Mr. Reynolds needs to have an at least 4%
higher return than the company standard rate of return on the investment. This
means we need at least a twenty percent return. This has to be expected return
on assets in a minimal of 3 years. Another factor is that this project can be done in
two methods which include capital intensive or labor intensive. When figuring out
how profitable these projects will be we need to figure out the cash flows from
both methods and we need to figure out how the competition will affect our
decision.

2.You recommend acceptance, how should the necessary plant capacity be


provided?

Now assuming that the project goes forward, one of two choices must be made
regarding the plans for the plant. Either the company designs the labor-intensive
or the capital-intensive plant. Both have positive and negative aspects, but the
labor-intensive plant seems to be the better of the two choices. This is not an
obvious choice, so it is necessary to compare the pros and cons of both plants in
order to come to a legitimate conclusion. It is important to look at what types of
products are currently being manufactured within the Jacobs Division.

3.How should Mr. Soderberg take the alternative prices into account in making
his decision about the Silicone-X project?

Sodeberg is concerned with the introduction of competition and the pricing for
Silicone X. In industry , it is best to be first to the market with your product , and if
this is not possible , then your product should be superior . In the case of Silicone
X there is no patent protection and there is no foreseeable product that is
superior , it is important that the company that manufactures this product for sale
be first to the market , so the competition will likely take a year to gear up after
the introduction of silicone X giving the Jacobs division two years of competition
free sales.

4.From MacFadden's point of view, how do you like Mr. Reynolds's method of
analyzing investments at the Jacobs Division?

Mr Reynolds has set very high standards for his products, expecting a return of
20% for new products . When Mr. Soderberg did an analysis on the two products
with a 20% return, the labor-intensive plant was a positive value, while the capital
was negative. Soderberg knew that this analysis would be unacceptable, so he
would have to somehow manipulate the data in order to get approval from Mr
Reynolds. It is important to acknowledge that at an 8 % rate, both plants have a
good return, but capital’s is significantly better. The labor-intensive model would
meet Reynolds’s approval at both the 20 and 8 % , while the capital-intensive
would only be acceptable under the 8 % rate , making it a difficult sell for
Reynolds to accept.