Cash Flow Analysis of Saturn’s Five Options
Saturn has five options to choose from, each leading to different performance levels as shown on the income and cash flow statements. Selecting expansion at Spring Hill at full scale production is the optimal option, when basing the decision criteria purely on cash flow analysis. Spring Hill at full scale production leads to an overall net present value of $227,191,496. This value is $23,615,796 greater than the next best financial option (Willow Run). Spring Hill at full scale production is also considerably better from a cash flow perspective compared to sourcing from a GM plant (NPV overall = $114,872,764) and choosing to run Spring Hill at low scale production (NPV overall = $92,659,914). Since each of these four aforementioned options leads to a positive net present value overall, they can all be deemed acceptable. Spring Hill at full scale simply stands out as the most favorable among these four. The fifth option, Bowling Green, leads to a negative overall net present value of -$230,759,517. Therefore, choosing this option is an unacceptable scenario. It is better off to delay expansion completely, at no incremental costs (and no incremental revenue), than pursue a financially detrimental expansion project such as Bowling Green. Once again, our cash flow analysis of each option concludes that opting for the Spring Hill at full scale production scenario is the optimal choice.
Scenario Analysis
It is unrealistic to expect 100% unit sales per year for the expansion project for Saturn. While the company does expect Saturn to do well, there are always unknown factors that can affect sales and it is best to remain conservative when projecting sales. Therefore, we lowered the unit sales in order to account for this. We did a sensitivity analysis to see what would happen under a variety of conditions. When we lowered sales by 50% per year, the NPV of our optimal decision, full scale expansion at Spring Hill, becomes negative at -$273,970,953. Actually, the NPV’s for each option become negative, and the best choice is to delay expansion. Less conservative sales projections yield different results. By lowering unit sales by 25% per year, sourcing models from another GM plant becomes the only option that does not yield a negative NPV at $45,780,983, and is therefore the optimal decision. However, if we lower projected sales by only 10%, full scale expansion (our optimal decision) remains the best decision with a NPV of $126,959,006, while the second choice decision would be to convert the existing factory at Willow Run, with a NPV of $110,011,086.