see the attachments and please only answer case 1 and ignore case two in the word attachment
Business case 1 Photonics: Financing and Investment Decisions-2 Please reading the following helpful hints before your proceed with the Photonics business case: This business case is centered on a fictitious company in the medical device equipment industry. It will test your ability to provide an analysis on how this firm should be financed, how this firm should be valued, and what new investment opportunities this firm should undertake. While this business case is based on a fictitious company competing against fictitious competitors, the industry depicted in this business case is quite real. As a result, the application of this business case has relevancy for solving real business decisions. I have provided the questions that you will need to answer for this business case. In general your write-up for the "Business Case Analysis" should be around 1.5 to 2 pages in length, singled spaced with a 12 point font. Please submit your write-up in a word document and not a PDF file. You will need to provide supporting calculations in an Excel file to justify your analysis and recommendations. Please note that business cases can be fairly ambiguous. I have provided you with most of the critical assumptions and data points that you will need to complete your analysis and recommendations. However, you will find that there are times when you will need to make an assumption to defend your recommendation. This is a fundamental part of the business case experience as it tries to mimic the "real word" where many times an organizational leader will be forced to make a decision without perfect knowledge. In your analysis clearly state the assumptions that you are making that are in addition to that ones that have been provided to you. In these situations I will be looking at the reasonableness of the assumptions that you make along with the persuasiveness of your argument. With business cases there is usually no one right answer. With this in mind, I will be evaluating your submission on critical analysis and logical reasoning, accuracy of your calculations, appropriate use of financial theory, and the professional quality of your write up. The attached word document is the Photonics business case along with the questions for both "Business Case Analysis" located at the end of the business case. The Excel file contains exhibit 1 and 2 as mentioned in the business case. Business Case – Financing and Investment Decision Analysis A Promising Start: In the summer of 2017, Photonics, a leader in the production of biometric sensors, started to experience a decline in sales growth for one of their most popular products, OxyAlert. OxyAlert was launched in 2014 and quickly became the industry standard in analyzing the oxygen levels of surgically repaired tissue after emergency care procedures. In the first year of sales this product captured 25% of the market in post operation biometric devices. By the second year it had rapidly overtaken the industry leader with a 55% share of the market. The success of this product was primarily due to innovative features that were not found on any other product. Features such as wireless disposable sensor probes and advance analytic software allowed doctors to shorten the recovery time of their patients in ICU units, which decreased per patient ICU expense by 10%. Based on these innovative features Photonics was able to charge a premium for this product and establish themselves as one of the most profitable companies in the industry. Several competitors have now closed the gap in product design and functionality. In the spring of 2017, SeaBridge, one of Photonics biggest rivals, launched the product TotalDiagnostic. This product contains similar disposable sensory technology as OxyAlert, however, it allows doctors to analyze a broader range of a patient’s biometrics. While this product was priced around 10% higher than OxyAlert, doctors had the added advantage of not only maintaining the same recovery rates but also decrease the rate of post surgical infection by 15%. By the early part of 2018, TotalDiagnostic had captured 30% of the market. Photonics response was swift. They immediately reduced the price of OxyAlert by 20% in order to regain market share. From March through May, sales of OxyAlert rebounded. While profit margins of the company did take a hit, it appeared that the price reduction stabilized the company’s market share. Unfortunately, recent sales reports from November show that pre-orders for OxyAlert are slightly down. From Research to Commercialization: Photonics was founded in 2011 by Rachel Walker, a professor of Bioengineering. From 2004 through 2009, Dr. Walker authored several papers on photonic measuring systems and it’s applications in biometrics. By 2010 she developed a prototype sensor that that was extremely non-invasive to the patient. She realized that this type of sensor combined with advanced computer algorithms could quickly analyze oxygen levels in surgically repaired tissues giving doctors “real time” information on the likelihood that a patient’s body would accept or reject the repaired tissue. Dr. Walker believed that she had an important technology that could be highly profitable if she could find a way to commercialize it. Given the uniqueness of this technology she was able to obtain a patent in 2011. She felt fairly confident that her technology would be a major improvement in post-surgical care. However, several obstacles existed. The cost to turn this technology into a commercialized product was fairly substantial. However, more importantly, this was a highly disrupted technology that would require hospitals to change ICU and post operation processes. She wasn’t even sure if hospitals had a desire to change their current practices. After interviewing several prominent hospital administrators, she concluded that that demand would be high if she could find a way to mass-produce her prototype at a cost that was on par with biometric sensors currently being sold to hospitals and other surgical centers. After several investor presentations, she was able to attract significant funding from a venture capital firm that specialized in funding small biomedical start-ups. With a $15 million dollar investment, Photonics was able to launch its first product, The BMD 1000, in January 2013. In the first three months of 2013, sales of the BMD 1000 were tepid at best. While the product design was innovative, it did not integrate well with the current technology employed by most hospitals. Based on the criticisms of this product, Dr. Walker and her engineering team went back to the drawing board. The redesigned product was named OxyAlert and was introduced to the industry with much fanfare in January of 2014. By July of 2014, Photonics had secured orders with several large health care facilities on the East Coast. One year later, OxyAlert become the standard in the biometrics device industry. Cash is King: In 2017 Photonics posted profits of $20M on net profits margins of 15%, which were above industry averages. Photonics is able to achieve higher profit margins due to the company’s unique business model. Photonics has very little long-term capital invested in manufacturing the company’s product. Instead it relies on outsourced contract manufactures to produce its product. As a result, the company can easily design and launch new products without the burden of constantly upgrading and retrofitting its manufacturing facilities. The company can also focus on what it does best which is designing and implementing new technologies for its customers. While this business model has allowed the company to dramatically reduce operational cost and increased its flexibility in the marketplace, it is not without its risk. Because the sales cycle in this industry is long and future sales are difficult to predict, Photonics struggles with managing its supply chain. Contract manufacturers need a steady flow of orders from Photonics in order to stay profitable. To satisfy the needs of its contract manufactures, Photonics carries a larger level of inventory than most of its competitors. Larger levels of “on-hand” inventory effectively tie up cash. This presents the unique dilemma where the company is highly profitable but struggles to maintain positive cash flow. Reinventing the business – Market Expansion: Not only is Dr. Walker nervous about the company’s operating business model, she is also worried about the company’s growth prospects. While Photonics is a leader in this sector, sales are currently concentrated in the North American market. Geographical expansion into Asian markets will be a top priority in the next year. Exhibit 1 (Excel file) shows the company’s five-year profit and loss projections as well as the company’s 5-year cash flow projections in two scenarios: “Aggressive Asian Expansion with OxyAlert” and “Slow Asian Expansion with OxyAlert”. In the “Aggressive Expansion” scenario the company will need to raise an additional $100 million dollars preferably through a initial public stock offering (IPO). This funding will be used to support large inventory acquisitions and a new warehouse facility. In the “Slow Expansion” scenario the CFO estimates that the company can fund its inventory acquisitions and other capital needs with operational cash flow and will not need to rely on external funding. Reinventing the business – New Product Development: While market expansion is of the outmost importance, Dr. Walker also realizes that the company’s current product line will be obsolete in a couple of years. Five years is the typical product life cycle in this industry. Fortunately, the company employs some of the brightest engineers in the field who have been developing three new interesting products that can ensure the company’s sales growth. The first product is an improved version of OxyAlert, codenamed “OxyAlertII”. The second product is completely new to the industry and will allow doctors in emergency rooms to diagnose certain conditions of incapacitated patients through quick blood tests. This product is codenamed “AutoAnalytics”. The third product is a complimentary product to OxyAlert that will enhance OxyAlert’s diagnostic capabilities. This product is codenamed “Diagnostic Solutions”. The following are brief descriptions of each product’s financial costs and revenue projections. For all projects assume a 20% tax rate on net income. OxyAlertII The marketing department believes that this product will not completely replace OxyAlert, as there will still be some customers who will want the older and cheaper version. However, they do believe that there could be some sales cannibalization of the old product. In the next five years, sales for OxyAlert are forecasted to steadily decrease by 10% each year in the North American market. First year sales of OxyAlertII are projected to be $52 million with a 16% increase in revenue each year through year 5. In the prior two years the company has spent $15 million to develop this product. To manufacture this new product, Photonics contract manufacturer requires an additional $25 million investment in new equipment purchases.