Garmin Analysis Looking to the Future Term Paper - 2200 Words

Garmin Analysis Looking to the Future (Term Paper Sample) Content: Assignment 3: Garmin Analysis à ¢Ã¢â€š ¬ Looking to the Future[Studentà ¢Ã¢â€š ¬s Name][College Name][Professors Name][Course Name][Task]AbstractGarmin Incorporated has gone through a face of rise to prominence in the periods of 2006 to 2008, the periods of 2009 to 2012 saw the emergence of aggressive competitors who have slowly been eating away Garminà ¢Ã¢â€š ¬s market share. Garmin has five major lines of revenue streams which are: Outdoor, fitness, marine, automotive/mobile, and aviation. The automotive/mobile stream has been the bread and butter of Garmin which has slowing been eroding away due to declining sales. Garminà ¢Ã¢â€š ¬s net sales declined by 2% in 2012 compared to 2011 and this decline was driven by the 6%2012 decline in revenues from the automotive/mobile segment. With this current situation and many other unimpressive situations in the Garminà ¢Ã¢â€š ¬s financial statements, something has to be done fast. This paper presents three capital budget ing scenarios and conducts andanalyses on them to determine which one is viable and suitable for Garmin.Keywords:decisions,NPV, IRR, PIIntroductionThe periods of 2004 to early 2009 saw Garmin Incorporated rise to prominence as a stable manufacturer of navigation, communication, information devices and applications engaging global positioning systems (GPS). Garmin managed to control of 50% of its market with much of its sales being driven by its automotive/mobile segment. From 2010 to 2012, aggressive competitors started eating into its market share, more so the automotive/mobile segment which used to be Garminà ¢Ã¢â€š ¬s bread and butter (Garmin Ltd, 2012). Consequently, Garmin started to experience decline in sales with 2012 recording a 2% decline much of which was attributes to the 6% decline in revenue from the automotive/mobile income segment. Unfortunately, the situation is unlikely to change given the aggressive nature of Garminà ¢Ã¢â€š ¬s competitors in coming up with alter native mobile devices and the shift in consumer demands. To rescue Garmin from further declining sales, a stable capital structure should be adopted. In this paper three capital budgeting scenarios have been presented; which are, assault on the smartphone market, the niche operator, and the status quo. This paper conducts an in-depth examination of the various opportunities that have been presented within these three scenarios utilizing capital budgeting analysis techniques.Capital Budgeting Analysis of the Three ScenariosDlabey and Burrow (2008), define capital budgeting as a collective term that refers to mechanisms and tools used to evaluate expenditure on long-lived resources. Capital budgeting usually complements the use of cost allocation for decision making by taking into account the time value of money and the lump-filled nature of capacity resources.According to Patra (2009), capital budgeting appraisal methods should focus on investing in the project that will give the hig hest return and increase profitability. These methods can be divided into two categories: traditional methods and discounted cash flow or time adjusted methods. Traditional methods include the Payback period method (PB), and Accounting rate of return (ARR). The discounted cash flow criteria include Net Present Value (NPV), Internal Rate of Return (IRR) and Profitability Index (PI) methods.For the three scenarios, the initial investment is $3 billion, to be invested over an 8-year period beginning January 1, 2013 at Garminà ¢Ã¢â€š ¬s 12% current cost of equity. Garminà ¢Ã¢â€š ¬s 2012, 4685 million in cash flows from operations will be used as the starting point for projections. The major assumptions are: * In situations where sales and cash inflows are expected to decline the formula PV has been used to estimate cash inflows. * In situations where cash inflow as are expected to increase, the formula for FV has been used to calculate the cash inflows.The present structure as at 2012 of Garmin is as illustrated below.Capital Budgeting structure Amounts in '000' of dollars Except ratios and percentages Outdoor Fitness Marine Automotive/Mobile Aviation Net Cash Outflows from operations Income before taxes 2010 150,973 86,499 62,431 205,887 71,482 577,272 Income before taxes 2011 171,245 107,881 60,092 171,717 73,226 584,161 Income before taxes 2012 167,734 114,274 35,725 231,618 75,177 624,528 Percentage of Net income before tax (2010) 26% 15% 11% 36% 12% 100% Percentage of Net income before tax (2011) 29% 18% 10% 29% 13% 100% Percentage of Net income before tax (2012) 27% 18% 6% 37% 12% 100% Cash outflows for 2010 (percentages x Net cash from operating activities) 201,543 115,473 83,343 274,852 95,426 770,637 Cash outflows for 2011(percentages x Net cash from operating activities) 241,065 151,866 84,593 241,729 103,082 822,334 Cash outflows for 2012 (percentages x Net cash from operating activities) 183,907 125,292 39,170 253,951 82,426 684,745 Table 1: Garmin à ¢Ã¢â€š ¬s capital structure 2012 1 Scenario I: Assault on the Smartphone MarketIn this scenario, the assault on the smartphone market should begin in 2013 where majority of the companyà ¢Ã¢â€š ¬s resources and capital will be directed towards assaulting this market. The capital needs will require external financing of about $3 billion for strategic acquisitions, research and development and other growth needs. Non-core businesses like fitness, marine units, and aviation will be de-emphasized. Consequently, sales in them will have to deteriorate for the sake of increased sales in the smartphone segment. In year three of this project, non-core operations will be divested to gain $500 million in cash. Rapid decline will be experienced in the automotive segment but this will be offset by sales in the $65 billion smartphone market which is growing at 20% clip every year. Garminà ¢Ã¢â€š ¬s market share in this industry currently stands at zero. Existing competitors in the market incl ude Blackberry, Google, Apple, HTC and Company, and Nokia among others. Outdoor Fitness Marine Automotive/Mobile Aviation Net Cash inflows from operations Present Value of cash inflows Year 2010 201,543 115,473 83,343 274,852 95,426 770,637 Year 2011 241,065 151,866 84,593 241,729 103,082 822,334 Year 2012 183,907 125,292 39,170 253,951 82,426 684,745 611,379 Future Cash Outflows - Year 1 205,976 140,327 43,870 284,425 92,317 766,914 684,745 Year 2 230,693 157,167 49,134 318,556 103,395 858,944 766,914 Year 3 130,901 89,181 27,880 356,782 58,669 1,163,413 1,038,762 Year 4 116,876 79,626 24,893 399,596 52,383 673,374 601,227 Year 5 104,354 71,094 22,226 447,548 46,770 691,992 617,850 Year 6 93,173 63,477 19,845 501,253 41,759 719,507 642,417 Year 7 83,190 56,676 17,718 561,404 37,285 756,273 675,244 Year 8 455,347 310,219 96,982 628,772 33,290 1,524,611 1,361,260 Total PV 6,388,419 Less Investment of $3Billion 3,000,000 NPV 3,388,419 Pay Back Period 1 /2 year 0.5 Profitabilit y index (PI) 2.13 Table 2 NPV, Payback Period, and PI calculations in Scenario IThe purpose of every capital budgeting analysis is to determine if a projectà ¢Ã¢â€š ¬s benefits are large enough to pay back the company for its cost of assets, cost project financing, and a rate of return that sufficiently compensates the firm for the risk inherent in the cash flow estimates (Brigham Daves, 2010). According to Dlabey and Burrow (2008) positive NPV signifies the project is viable, profitable, and can enable the company recover its initial costs. A zero NPV infers a break-even point where no profits or loss is realized, and a negative NPV infers the benefits from the project are not large enough to recover initial costs (Besley Brigham, 2008). In this respect, negative NPVs are often rejected. The first scenario, which involves assaulting the Smartphone market, would produce a positive NPV of $3.38 billion at the end of the eight-year timeline.A look at the Profitability index shows th at this project when pursued shall generate a PI of 2.13. According toPatra (2009), Profitability index is a cost benefit ratio which should be greater than 1 for a project to be accepted. When the PI is less than 1, such a project should be rejected. This first scenario investment proposal has a PI of 2.13, which infers that this project should be accepted.Thepositive NPV of $3.38 billion and the PI of 2.13 could be strong reasons to pursue this first approac...