FINANCE-Ford Finance Recruiting FINANCE MBA CASE FOR CAMPUS INTERVIEW

QUESTION

Ford Finance RecruitingFINANCE MBA CASE FOR CAMPUS INTERVIEWInstructionsIn this fictitious case, you are a financial analyst in the Automotive Strategy staff of One World Automotive,a global manufacturer of automotive vehicles and products. Your responsibilities include evaluating thefinancial and strategic implications of corporate investment decisions.Attached are relevant e-mails and data you have received from your manager, Les Dett.For your meeting with the Ford Finance interviewers:1. Review the attached material and prepare a one-page executive summary that addresses thealternative strategies outlined in the series of e-mail communications with Les Dett and others.2. Please include the following items in your summary:a. Financial analyses for each alternative you consider, as directed by Les in his e-mailb. Your recommendation for which alternative should be chosen (if any)c. A brief discussion of additional information that would assist you in your evaluation of thealternatives3. Bring two additional copies of your one-page executive summary to the interview. Please bringyour back-up calculations and any supplemental analyses that you have done.4. It is expected that you will work independently, and that you will keep your work confidential.Note: Ford Finance assessment material. Data are fictional and are not an assessment of financial performance.1Ford Finance RecruitingFINANCE MBA CASE FOR CAMPUS INTERVIEWE-Mail for AnalystFrom:To:Subject:Date:Les DettAnalystC-Car Capacity StudyJune 24, 2014 1:42 pmAnalyst,I need your help evaluating a manufacturing decision. If you look at the attached volume schedule, you can seethat we do not have sufficient capacity to meet global demand for our small car, the Vision. There are manyfactors to consider as we think about how to increase our capacity, but as we enter into the discussion, I want to bearmed with appropriate financial data. Would you please look at the attached data I’ve been able to collect andevaluate some alternatives?Here are three ideas I had. I’m not sure they all make sense, but let me know what you think:1. We have already closed our assembly plant in Alabama because the Nomad has gone out of production.Could we reopen that plant to meet the global shortfall?2. We could take advantage of government incentives in India and build a new facility in Chennai, takingadvantage of a growing automotive supply base there.3. We have excess C-Car capacity in Europe (at our Saarbrücken plant) for most of the business plan period.Perhaps we could use that excess capacity to meet global demand.Assume in the cases of #1 and #2 that the plants in question would have a base capacity of 350,000 units but thatwe could get an incremental 10% volume in each year at no cost if needed. I’ll have Bob Lee in manufacturingprovide you with some information on labor costs and investment levels. There’s no opportunity to expand thecapacity at our plant in Saarbrücken, Germany because it is landlocked.Please lay out the alternatives so we can understand the impact on the income statement (including operatingmargins) and do a cash flow analysis. For cash flow assume we’ll stop shipping at the end of 2021 in anyscenario. Let me know which one you’d recommend based on the available data, and please let me know alsowhat other data would be required to enhance your analysis.Regards,Les DettController, Automotive StrategyNote: Ford Finance assessment material. Data are fictional and are not an assessment of financial performance.2Ford Finance RecruitingFINANCE MBA CASE FOR CAMPUS INTERVIEWONE WORLD AUTOMOTIVEC-Car Sales & Production VolumesUS201620172018201920202021Total Industry (Mils.)C-Segment (Mils.)Segmentation Percent16.02.616%16.53.018%16.53.320%16.83.420%16.93.420%17.03.420%OWA C-Car Volumes (000)Share of Segment33313%38613%42913%43713%43913%44213%Available Capacity (000)250250250250250250Surplus/(Shortfall)(83)(136)(179)(187)(189)(192)Europe201620172018201920202021Total Industry (Mils.)C-Segment (Mils.)Segmentation Percent23.53.816%23.53.816%24.03.816%24.04.117%24.54.418%25.05.020%OWA C-Car Volumes (000)Share of Segment37610%37610%38410%40810%44110%50010%5005005005005005009259-Available Capacity (000)Surplus/(Shortfall)124124116Asia201620172018201920202021Total Industry (Mils.)C-Segment (Mils.)Segmentation Percent40.08.020%42.08.420%44.08.820%46.09.220%48.09.620%50.010.020%OWA C-Car Volumes (000)Share of Segment6008%6728%7048%7368%7688%8008%Available Capacity (000)550550550550650650Surplus/(Shortfall)(50)(122)(154)(186)(118)(150)Total (including other)*Total OWA C-Car Volumes (000)1,4591,5841,6671,7311,7981,892* Other markets include South America, Africa, and Direct MarketsNote: Ford Finance assessment material. Data are fictional and are not an assessment of financial performance.3Ford Finance RecruitingFINANCE MBA CASE FOR CAMPUS INTERVIEWE-Mail for Les DettFrom:To:Subject:Date:Bob LeeLes DettRE: C-Car Capacity Study – AssumptionsJune 23, 2014 5:35 pmLes,Here’s the data my team was able to pull together.By the way, I mentioned this study to Jim in Logistics for his input and he said we don’t want to forget about Freightfor shipping the units. The Vision has a normal freight cost to dealers of about $450 per unit within the regionwhere it’s built, but inter-regional ocean shipping for vehicles is significantly more expensive. He said you shouldassume an incremental $600 per unit cost for shipping between any regions and then another $200 per unit costfor units being shipped from Asia into North America due to special ocean shipping requirements.From a Human Resources perspective, re-opening the Alabama plant would mean new jobs in the U.S. that theunions would support, but we’re unlikely to get any concessions on labor costs to make it happen.If you need any more data from my team, just let me know.Bob LeeManagerManufacturing Finance—-Original Message—–From:Loretta CallTo:Bob LeeSubject:RE: C-Car Capacity Study – AssumptionsDate:June 23, 2014 4:30 pmBob,Per the discussion at our team meeting, we were able to pull together some data for the study.The Alabama plant is older but it could be retooled from truck production to build small cars for about $475 million.This would be all tooling with an expected accounting life of 5 years. We could have the plant re-tooled forproduction at the start of 2016. We should assume all the spending takes place in 2015.Since Chennai #1 is already at maximum capacity, a new facility would be required and is considerably moreexpensive than the Alabama re-tool. After government incentives, we’d need about $250 million to secure the landand facilities and another $425 million in tooling. Per corporate guidelines, the land and facilities are amortizedover 50 years, but the tooling would have the same 5-year life as the Alabama tooling. We could have the plant upand running for January 2017 if we pay for land & facilities in 2015 and tooling in 2016.The good news is that Saarbrücken already builds the Vision for Europe and even though there are minordifferences between the European version and the Vision sold in North America and Asia, no new tooling would berequired and any other fixed costs could be absorbed within the plant’s existing budget.I didn’t include the labor rates here because you said Les already had that data, but let me know if you need them.I just sent the latest rates to Casey for their review so they should be up to date.Loretta CallSupervisorManufacturing FinanceNote: Ford Finance assessment material. Data are fictional and are not an assessment of financial performance.4Ford Finance RecruitingFINANCE MBA CASE FOR CAMPUS INTERVIEWE-Mail for Les DettFrom:To:Subject:Date:Casey BishopLes DettVision Per Units – Purchasing UpdateJune 24, 2014 8:03 amLes,Further to my note below, Purchasing has just confirmed that with some changes to their supplier footprintassumptions on the Vision, we can take advantage of some lower wages and local manufacturing incentives andachieve a $200 per unit savings on material cost for any units sourced out of Asia.Casey—-Original Message—–From:Casey BishopTo:Les DettSubject:Vision Per UnitsDate:June 23, 2014 2:15 pmLes,I got a call that you needed some data for the Vision. Our present assumptions are shown below and are based onthe latest projections and volumes. These are global averages per unit, except as noted.Variable cost per unit is $14,000* and includes material, warranty and freight costs to the plant. I think Bob gaveyou the freight costs from the plant.Structural Costs are broken out as follows:Allocated Fixed Costs on existing production – $1,100 per unitLabor and Overhead – $1,200 per unit (but varies by location — see below)RegionLabor and Overhead Cost(per unit)North America (Alabama)Europe (Saarbrücken)Asia-Pacific (Chennai #1)$1,500$2,000$500Marketing is still carrying a global average price of $18,000 per unit and with fuel prices the way they are and thenew technology being offered on the Vision, we aren’t expecting to have to offer any incentives to meet our salesprojections.* There is an open assignment to Purchasing to review these costs and identify opportunities around materialcost.Casey BishopProduct Development ControllerNote: Ford Finance assessment material. Data are fictional and are not an assessment of financial performance.5Ford Finance RecruitingFINANCE MBA CASE FOR CAMPUS INTERVIEWMEMO:From:To:Subject:Date:Corporate Treasurer’s OfficeAll Global Car Finance EmployeesCorporate Finance AssumptionsJune 1, 2014We want to take this opportunity to remind all Finance employees of the Corporateassumptions. Using these common assumptions in our analysis across the all functions andregions ensures that we provide our operating management with consistent analysis and allowthem to make the best decisions for the Company.Corporate Weighted Average Cost of Capital – 12%WACC should be used as the standard hurdle rate for most decisions.Corporate Tax Rate — 35%DepreciationTooling & Equipment – varies based on expected lifeLand, Facilities – 50 yearsAssume straight line depreciation in all casesOperating MarginOperating margin is equivalent to Profit Before Tax divided by Total Revenue. Profit Before Taxis calculated as follows:Net RevenueLess Variable CostLess Labor & OverheadLess Program SpendingLess Other Fixed CostInventory ValuationInventory should be valued on a First In, First Out basisNote: Ford Finance assessment material. Data are fictional and are not an assessment of financial performance.6

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