Catanza Technologies Case Study (Written as at January 2019) Read the case study which follows and answer the 2 questions at the conclusion. Catanza Technologies was founded in Brisbane in 2002 at Eagle Farm as a specialist in industrial sensor technology. In 2008, they expanded into industrial robots, however this sector fell into decline leading-up to the departure of automotive manufacturers from Australia by 2017. In 2014 they launched a commercial grade robotic floor cleaner which has had a steady growth in revenues and market share. The company’s turnover by product type is shown below: Product 2014 2015 2016 2017 2018 Industrial Sensors 16.2 12.8 19.4 16.9 17.2 Industrial Robots 8.2 6.4 4.9 4.7 5.1 Robotic Floor Cleaner 0.4 0.8 1.3 1.9 2.6 The company is now (January 2019) considering the development of commercial robotic lawn management tools and equipment and, as a first step, a detailed plan has been put forward to produce a commercial grade robotic lawnmower (code named the RLM19). Market research was conducted in 2015-2016 and this revealed that commercial customers make their decisions in this market on the basis of mowing area per day based on running time per charge and battery charging time, maximum height of cut, precision of navigation, ease of GSB014 Business Decision Making and Analysis: Unit Guide 24 programming, adaptability to uneven surfaces, hill-climbing ability, obstacle sensing and avoidance, price, safety and anti-theft. Taking this market research information into account, the company is now seeking to develop a production prototype based on one of two different approaches. Electric wire (EW) perimeter or GPS and sensing navigation (GPS). For the EW model, a wire is placed around the perimeter of the area to be mown and then connected to an electrical source. This mower is programmed not to cross the wire. Because of the need to lay wire and the battery life the EW model will have a mowing area of about 3000 square metres per day. The GPS model would use sensors to detect garden edges and also GPS and mapping data to navigate without use of the wire. This enables them to be more versatile and suited to larger areas of up to 12000 square metres per day. The market research and development of the designs so far have already cost $1.65 million. If a decision to continue is made, it is hoped that a successful prototype can be developed by December 2019. For the EW prototype, the company's chief engineer, Scott Shorten, has estimated that there is a 75% chance that the December target could be achieved for the EW model with a further investment of $1.75m. If the target is not achieved, the company will review the situation in January 2020. It could decide to abandon the entire project or to allow further work on the prototype. Shorten estimates that modification of an unsuccessful prototype would cost around $0.8 million and the modifications would take an additional six months to implement. He is, however, sure that all problems would be overcome by end June 2020. For the GPS prototype, Shorten estimates that there is a 60% chance that the December target could be achieved for the GPS model with a further investment of $3.3m. If the target is not achieved, the company will review the situation in January 2020. It could decide to abandon the entire project or to allow further work on the prototype. Shorten estimates that modification of an unsuccessful prototype would cost around $1.9 million and the modifications would take an additional year to implement. He is, however, sure that all problems would be overcome by end December 2020. Following the development of a successful prototype, manufacturing would be conducted in partner facilities in China. The manufacturing facilities require a six-month lead-time for retooling and component sourcing for the EW and twelve months for the GPS solution. If a successful EW prototype was developed by Dec 2019, production could commence in July 2020. However, if the prototype development for the EW solution took until June 2020, then production could commence in Jan 2021. Shorten estimates the retooling and production line set-up costs for the EW solution to be $1.25m. EW units are expected to sell for between $3500 and $4500. If a successful GPS prototype was developed by Dec 2019, production could commence in Jan 2021. However, if the prototype development for the GPS solution took until December 2020, then production would not commence until Jan 2022. Shorten estimates the retooling and production line set-up costs for the GPS solution to be $2.7m. GPS units are expected to sell for between $14000 and $16000. Sales of the RLM19 would be supported by a major advertising and marketing campaign at trade shows, direct to grounds maintenance contractors, councils and other owners of golf GSB014 Business Decision Making and Analysis: Unit Guide 25 courses, airfields and playing fields. This would be conducted especially in the first few months after its launch, demonstrating the major cost saving benefits. In order to estimate the sales that would result, extensive use has been made of market research, economic and industry-wide data. A key threat is the development of competitive products by leading mower manufacturers and new entrants with robotics and electric motor technologies. To simplify the problem, the management team has decided to estimate sales under two different market conditions: Good, and Poor. These conditions can be assumed to prevail through the entire life of the product. The probabilities of these conditions prevailing are thought to depend to some extent on how quickly the product can be launched since an early launch will give Catanza an edge over potential competitors. The Marketing Department has estimated the following probabilities: Market Conditions Prevailing Good Poor Month Production Commences July 2020 0.8 0.2 January 2021 0.65 0.35 January 2022 0.5 0.5 It has been decided to use a 6-year planning horizon (i.e. up to December 2025) since technological developments would probably mean that a new model would be required for the market for later years. The tables below show the estimated net cash flows which will occur during the years of the product's life. EW – Good EW – Poor GPS – Good GPS - Poor 1 st Year $6m $2m $10m $4m 2 nd Year $9m $4m $16m $7m 3 rd Year $12m $6m $18m $9m 4 th Year $16m $7m $22m $11m 5 th Year ** $18m $9m $26m $13m ** If required In the event of the either prototype development being cancelled it can be expected that the intellectual property associated with the research output will have no residual value. GSB014 Business Decision Making and Analysis: Unit Guide 26 The company's cost of capital is estimated to be 8%. For simplicity, it can be assumed that all cash flows occur at the end of the year. Also, the effect of factors like taxation and development grants should be ignored.