Cyberlab: A New Business Opportunity for Prico (a)

Abstract

The president of a large and established manufacturer of laboratory equipment has to decide whether to invest $1 million for 30% equity in a start-up company in the field of lab robotics. The agreement would also allow his company the right to market the product. He already has a spreadsheet that projects the best guess of the future scenario and calculates several measures of performance (ROS, ROE, ROI, NPV, and IRR). He must decide which of the criteria are most useful. A relevant-cost issue that is introduced must be resolved, because it makes a big difference in the NPV. In the supplement, some background material is provided for a forecasting/judgmental assessment exercise based on this decision. The supplement could, assuming students have already been introduced to this topic, form the basis for a short workshop (an hour or less) on judgmental probability, or it could be used with a note on cumulative probability distributions for an introductory class on the topic. (The B case number is UVA-QA-0383, and a supplement to the A case is UVA-QA-0384.)

Excerpt

UVA-QA-0382

CYBERLAB: A NEW BUSINESS OPPORTUNITY FOR PRICO (A)

The Precision Instrument Corporation (PRICO) was a major manufacturer of equipment used in the research laboratory. CyberLab, a new venture in the field of lab robotics, had just offered 30% of CyberLab equity to PRICO in exchange for $ 1 million in capital and a marketing agreement. Under the plan, PRICO would market all of CyberLab products through its existing international distribution system. CyberLab had a patent pending on its robot system and had just finished construction of a small manufacturing facility in New Milford, CT. It also had operational prototypes for all its products, but now needed a capital infusion to develop a major manufacturing facility and to provide working capital for expanded operations. Some aspects of the CyberLab proposal were attractive to James Campbell, President of PRICO, but others were downright frightening. A significant new market could be harvested by his company, or the million dollar investment could vanish down a rat hole. Campbell needed to understand the financial soundness of PRICO's opportunity.

The Inception of CyberLab

CyberLab had started in 1985 as a result of the frustration of Dr. H. Meltzer, a biochemist working at the New York Psychiatric Institute. Dr. Meltzer was preparing and testing human enzymes in bioassays. Preparing samples was taking an inordinate amount of time and expense; human enzymes were extremely expensive, and manual sample preparation tended to waste enzyme. Dr. Meltzer was looking for an automated system that could prepare his samples, but none existed with the accuracy and reliability he needed for his tests. When he outlined his needs to his son, Walter Meltzer thought a system could be developed and the project began.

Two years later, the CyberLab system prototype was complete. Walter had designed the prototype with the idea that, eventually, all the components that needed machining could be subcontracted, and the remaining parts could be purchased from readily available sources.

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Keywords: capital budgeting, financial-statement analysis, investment analysis, relevant costs, simulation, valuation