Overhead Costs

2) Spillover effects (positive and negative as described in case)

Classically spillover effects are the impact of certain economic activities which may seem unconnected initially. In the context of this case, the launch of New Line will have an impact on both the Modern (positive) and the Old Line (negative - cannibalisation). There are differing opinions on whether cannibalisation should be part of the cash flow consideration of an investment decision - with some arguing for no consideration and some arguing that:

a) it should be modelled if the industry/tech is patent protected and threat of new entry is low (i.e. Pharmaceuticals industry)

b) it should be not be modelled if we are a competitive industry with high likelihood of your own products being cannibalised

In the case studied here, we believe that the analysis of the decision to invest in the New Line should include the impact on the two existing lines -Modern and Old as it impacts the cashflows of the project and it's unclear if the industry is competitive or patent protected. Based on our calculations the New Line will have a clear cannibalisation effect on the Old Line, with sales declining at a much faster rate YoY with the launch of this extension.

Working capital has been calculated as a percentage of sales, based on the estimates provided by the case - based on historical data of domestic DIY products- since there isn’t enough data to estimate working capital based on the difference between assets and liabilities on each year of the forecast period. Nevertheless, this method presents some disadvantages - it doesn’t consider unforeseen events such as emergency repairs in equipment, inventory build-up, opportunities to buy discounted raw material, etc. Besides it is highly dependent on the sale forecast, so if the forecast is faulty it will also affect the estimates