UVA-F-1670TN
Rev. Apr. 28, 2016
The Procter & Gamble Company:
Investment in Crest Whitestrips Advanced Seal
Teaching Note
Synopsis and Objectives
In May 2008, the Procter & Gamble (P&G) North America Oral Care group is considering launching a
new Crest Whitestrips line, Advanced Seal. The product improves on existing at-home tooth enamel
whitening treatments, providing better adhesion to the teeth and thus better whitening results. The group is
concerned about the willingness of customers to adopt the new line and the effect the new line will have on
existing P&G whitening products.
The task for students is to build a model to forecast the expected incremental cash flow from the
initiative, with particular attention paid to the cannibalization of existing whitening business. Students are
presented with several alternative scenarios for launching the business and are expected to comment on the
value implications of each scenario. The case provides a good blend of finance and marketing tools.
The student objectives of the case are fourfold:

To build competence in discounted cash flow (DCF) analysis

To motivate more advanced issues in DCF analysis, such as the modeling of strategic choices and
building an appreciation for cannibalization effects of existing business in project investment
decisions

To encourage scenario analysis and the identification of “value drivers” in a discounted cash flow
model

To facilitate tie-ins between finance and marketing curriculum
This case is designed to be an intermediate or secondary case in a module on capital budgeting. The case is
not complicated, but does presuppose some exposure to DCF analysis.
This teaching note was written by Michael J. Schill, Associate Professor of Business Administration. Copyright © 2013 by the University of Virginia
Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to sales@dardenbusinesspublishing.com. No part of this
publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or
otherwise—without the permission of the Darden School Foundation.
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Suggested Questions for Advance Assignment to Students
1. What is P&G’s motivation for the Advanced Seal launch?
2. Does the project appear economically viable? Which strategic proposal do you find most appealing?
Build a four-year DCF model to support your recommendation.
3. What are the key value drivers of the Advanced Seal investment?
4. What recommendation would you make to Roman for P&G’s investment in Advanced Seal?
Supporting Spreadsheet Files
For students:
UVA-F-1670X
For instructors:
UVA-F-1670TNX
Please do not share the instructor’s file with students.
Hypothetical Teaching Plan
The following questions form a generic outline for a 90-minute class discussion.
1. What is the situation at P&G?
This question sets the stage for the case discussion. P&G is a dominant player in the North American
oral care industry. P&G’s dominance persists in the at-home teeth whitening category, but the market is small
(3% household penetration rate) and has experienced little growth in past years. P&G and peers have tried a
number of times with little success to launch products that expand the category. The Advanced Seal
technology considered in this case overcomes a persistent adhesion problem with at-home whitening strips.
P&G can use the better adhesion to improve household penetration.
Decisions that the Oral Care group must make include the expenditure in commercializing the Advanced
Seal product, the magnitude of the advertising budget, and the positioning of Advanced Seal with respect to
P&G’s existing Premium and Basic Whitestrips.
2. What do you recommend?
Students should be invited to summarize the findings of their analysis. Based on the figures in the case,
the instructor can anticipate that student recommendations will divide based on risk tolerance. Strategies with
greater upside (the “drive revenue” strategy) face greater downside risk due to significant cannibalization
effects. Strategies with less opportunity to expand the category (the “minimize cannibalization” strategy) face
less downside risk. The instructor can query students on the rationale for the decision with an interest in
getting beyond the net present value (NPV) to understanding what drives the cash flows (e.g., the price
elasticity of demand and the cannibalization effects). Some students may argue that the model fails to capture
all of the upside entailed in growing the category (i.e., the drive revenue scenario), because any category growth
gains will be monetized well after the four-year period modeled in this case. Exhibit TN1 provides a summary
of the various scenarios discussed in the case.
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UVA-F-1670TN
3. How did you model the expected cash flow from Advanced Seal for the strategy you recommend?
This discussion provides an opportunity to review the mechanics of the discounted cash flow model used
to capture the effects of the various initiatives. The instructor might begin with a full discussion of the base
case valuation.
Exhibit TN2 presents an example of a DCF analysis associated with the base case scenario. The per-unit
revenue and gross profit figures come from case Exhibit 6. The volume, advertising expenses, selling, general,
and administrative expenses, capital investment, startup expenses, tax rate, and discount rate all come from
the text of the case. The depreciation expense is based on the depreciation schedule in case Footnote 3. The
terminal value for the capital expenditure is calculated as the tax shield of the remaining book value
($691 million) times the tax rate. The base case NPV is $3.5 million at a cannibalization rate of 50%,
$1.4 million at a cannibalization rate of 55%, and −$0.7 million at a cannibalization rate of 60%. The
Advanced Seal launch appears to be economically attractive if the cannibalization rate is not too high.
Although a chalkboard may be the most effective way to walk through the details of the base case model,
for the remainder of the analysis, it is helpful to have an electronic spreadsheet displayed to quickly evaluate
the effects of changes in the parameters. Using the base case model, one can begin to explore the value
drivers of the initiative. It is also important to understand the distribution in gross profit and why this
explains the importance of cannibalization rate. In effect, because of the variation in gross profit, P&G’s
strategy should be to encourage customers to trade up and cannibalize Basic units for Advanced Seal units,
but also to preserve and encourage as much Premium usage as possible, even at the expense of Advanced
Seal.
One can also use the model to measure the effect of other parameter assumptions. For example, working
capital management has little effect. As the working capital turnover varies from 9 times to 8 times, the NPV
of the project declines $0.08 million, from $3.518 million to $3.436 million.
4. What do you think of Whitman’s proposal to drive revenue?
The students should isolate the main parameters of this campaign. The idea is to drive incremental
Advanced Seal units by dropping the price by $1, to $21, and spending an additional $1.5 million in the first
year on a digital campaign and an expansion of the initial media plan. The expected effect on the number of
additional units is 1.25 million, for an annual total of 3.25 million Advanced Seal units. Such a unit increase
suggests high price elasticity of demand, with demand increasing 62.5%, for a 10% reduction in price. At first,
the proposal should be gross-profit-positive if the incremental units are greater than 222,222 units. This
breakeven number comes from equating the loss of $2 million in gross profit (due to the price drop to $9)
times the incremental number of units; it does not include the additional advertising expenses or working
capital investment.
As Tam identifies, however, the proposal increases the range of expected cannibalization rates to one of
50% to 65%. At the low end of the cannibalization range (50%), the proposal increases the project NPV to
$4.5 million. At the high end (65%), the proposal increases the project NPV to −$5.9 million. Exhibit TN3
provides the full model of the proposal under the low-end cannibalization rate. The instructor can invite
comment on expectations for cannibalization rates for the proposal as well as tolerance for the additional risk.
5. What do you think of Tam’s proposal to minimize cannibalization?
This initiative proposes that P&G minimize cannibalization by doing the opposite of the Whitman
proposal: raise price and decrease advertising. In terms of gross profit on Advanced Seal, this proposal
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UVA-F-1670TN
generates negative contribution: P&G loses $20 million in gross profit ($10 × 2 million units) while gaining
only $11 million ($11 × 1 million units). These losses are potentially offset by the reduction in advertising
spend, working capital investment, and particularly the cannibalization effect. Not only does the
cannibalization rate decline but becomes more certain at 45% for Premium. Exhibit TN4 provides the full
model analysis for the proposal. The NPV is $2.0 million.
6. What should P&G do?
The analysis identifies the key bets the Oral Care group is making. The category expansion effect and the
cannibalization effect are key bets for this project. The analysis presented in this note shows how the pricing
and advertising expenditures generate cannibalization of existing product lines and profits. The low-risk
strategy is to go with Tam’s proposal that generates a more certain $2 million. The more aggressive revenueexpansion strategy better accomplishes the objective to expand the category but creates larger swings in
wealth implications. If category expansion materializes, P&G will be much better off. If, on the other hand,
there are large cannibalization effects, P&G will be much worse off. This is a decision that P&G managers
face with a host of their products.
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UVA-F-1670TN
Exhibit TN1
The Procter & Gamble Company:
Investment in Crest Whitestrips Advanced Seal
Summary of Scenarios
Scenario
Base case
Base case
Base case
50% cannibalization
55% cannibalization
60% cannibalization
Drive revenue
Drive revenue
Drive revenue
50% cannibalization
57.5% cannibalization
65% cannibalization
3,250
3,250
3,250
-1,625
-1,869
-2,113
Min. cannibalization
45% cannibalization
1,000
-450
Gross
margin
31%
29%
25%
Increm.
revenue
$22,100
$20,300
$18,500
NPV (M)
$3,518
$1,385
-$748
IRR
25.7%
15.4%
3.7%
-488
-488
-488
24%
19%
11%
$32,663
$28,275
$23,888
$4,485
-$714
-$5,914
26.1%
4.8%
-22.6%
-150
39%
$12,950
$1,998
20.3%
AS units Prem units Basic units
2,000
-1,000
-300
2,000
-1,100
-300
2,000
-1,200
-300
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UVA-F-1670TN
Exhibit TN2
The Procter & Gamble Company:
Investment in Crest Whitestrips Advanced Seal
Base Case Valuation
Assumptions
Advanced Seal
Premium Product
Basic Product
$22
$12
$10
$18
$7
$11
50%
$13
$6
$7
15%
Per unit revenue and costs
Revenue
COGS
Gross profit
Cannibalization rate
Year 0
Year 1
Year 2
Year 3
Year 4
2,000
-1,000
-300
700
2,000
-1,000
-300
700
2,000
-1,000
-300
700
2,000
-1,000
-300
700
1,000
6,000
4,000
1,000
6,000
4,000
1,000
6,000
4,000
1,000
6,000
4,000
20.0%
9.0
32.0%
9.0
19.2%
9.0
11.5%
9.0
Revenue
Adv Seal
Premium+Basic
Incremental revenue
44,000
-21,900
22,100
44,000
-21,900
22,100
44,000
-21,900
22,100
44,000
-21,900
22,100
Gross profit
Adv Seal
Premium+Basic
Incremental gross profit
20,000
-13,100
6,900
20,000
-13,100
6,900
20,000
-13,100
6,900
20,000
-13,100
6,900
-1,500
-600
-900
2,000
1,000
800
3,100
1,240
1,860
2,000
1,000
1,280
2,620
1,048
1,572
2,000
1,000
768
3,132
1,253
1,879
2,000
1,000
461
3,439
1,376
2,064
2,456
4,000
2,456
3,200
2,456
1,920
2,456
1,152
0
691
-900
1,860
800
1,572
1,280
1,879
768
0
2,660
2,463
0
2,852
2,445
0
2,647
2,101
2,064
461
-276
-2,456
5,256
3,864
Volume
Adv Seal
Premium
Basic
Incremental
SG&A expenses
Advertising (Adv Seal)
Foregone advertising (Prem + Basic)
Capital investment
Startup costs
Depreciation schedule
Net working capital turnover
Tax rate
Discount rate
Incremental advertising exp
SG&A expenses
Depreciation
Incremental EBIT
Taxes
NOPAT
Net working capital
Net PP&E
Free Cash Flow
NOPAT
+ Depreciation
- Capital expenditures
- Investment in NWC
Free cash flow
Discounted value
NPV
IRR
4,000
1,500
40%
8%
1,500
4,000
2,456
-7,356
-7,356
3,518
25.7%
3,518 NPV with minimum Premium cannibalization (50%)
-748 NPV with minimum Premium cannibalization (60%)
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UVA-F-1670TN
Exhibit TN3
The Procter & Gamble Company:
Investment in Crest Whitestrips Advanced Seal
Scenario: Proposal to Drive Revenue (in thousands of dollars)
Assumptions
Advanced Seal
Premium Product
Basic Product
$21
$12
$9
$18
$7
$11
50%
$13
$6
$7
15%
Per unit revenue and costs
Revenue
COGS
Gross profit
Cannibalization rate
Year 0
Year 1
Year 2
Year 3
Year 4
3,250
-1,625
-488
1,138
3,250
-1,625
-488
1,138
3,250
-1,625
-488
1,138
3,250
-1,625
-488
1,138
1,000
7,500
4,000
1,000
6,000
4,000
1,000
6,000
4,000
1,000
6,000
4,000
20.0%
9.0
32.0%
9.0
19.2%
9.0
11.5%
9.0
Revenue
Adv Seal
Premium+Basic
Incremental revenue
68,250
-35,588
32,663
68,250
-35,588
32,663
68,250
-35,588
32,663
68,250
-35,588
32,663
Gross profit
Adv Seal
Premium+Basic
Incremental gross profit
29,250
-21,288
7,963
29,250
-21,288
7,963
29,250
-21,288
7,963
29,250
-21,288
7,963
-1,500
-600
-900
3,500
1,000
800
2,663
1,065
1,598
2,000
1,000
1,280
3,683
1,473
2,210
2,000
1,000
768
4,195
1,678
2,517
2,000
1,000
461
4,502
1,801
2,701
3,629
4,000
3,629
3,200
3,629
1,920
3,629
1,152
0
691
-900
1,598
800
2,210
1,280
2,517
768
0
2,398
2,220
0
3,490
2,992
0
3,285
2,608
2,701
461
-276
-3,629
7,067
5,195
Volume
Adv Seal
Premium
Basic
Incremental
SG&A expenses
Advertising (Adv Seal)
Foregone advertising (Prem + Basic)
Capital investment
Startup costs
Depreciation schedule
Net working capital turnover
Tax rate
Discount rate
Incremental advertising exp
SG&A expenses
Depreciation
Incremental EBIT
Taxes
NOPAT
Net working capital
Net PP&E
Free Cash Flow
NOPAT
+ Depreciation
- Capital expenditures
- Investment in NWC
Free cash flow
Discounted value
NPV
IRR
4,000
1,500
40%
8%
1,500
4,000
3,629
-8,529
-8,529
4,485
26.1%
4,485 NPV with minimum Premium cannibalization (50%)
-5,914 NPV with minimum Premium cannibalization (65%)
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UVA-F-1670TN
Exhibit TN4
The Procter & Gamble Company:
Investment in Crest Whitestrips Advanced Seal
Scenario: Proposal to Minimize Cannibalization (in thousands of dollars)
Assumptions
Advanced Seal
Premium Product
Basic Product
$23
$12
$11
$18
$7
$11
45%
$13
$6
$7
15%
Per unit revenue and costs
Revenue
COGS
Gross profit
Cannibalization rate
Year 1
Year 2
Year 3
Year 4
Volume
Adv Seal
Premium
Basic
Incremental
Year 0
1,000
-450
-150
400
1,000
-450
-150
400
1,000
-450
-150
400
1,000
-450
-150
400
SG&A expenses
Advertising (Adv Seal)
Foregone advertising (Prem + Basic)
1,000
5,000
4,000
1,000
5,000
4,000
1,000
5,000
4,000
1,000
5,000
4,000
20.0%
9.0
32.0%
9.0
19.2%
9.0
11.5%
9.0
23,000
-10,050
12,950
23,000
-10,050
12,950
23,000
-10,050
12,950
23,000
-10,050
12,950
11,000
-6,000
5,000
11,000
-6,000
5,000
11,000
-6,000
5,000
11,000
-6,000
5,000
-1,500
-600
-900
1,000
1,000
800
2,200
880
1,320
1,000
1,000
1,280
1,720
688
1,032
1,000
1,000
768
2,232
893
1,339
1,000
1,000
461
2,539
1,016
1,524
1,439
4,000
1,439
3,200
1,439
1,920
1,439
1,152
0
691
-900
1,320
800
1,032
1,280
1,339
768
0
2,120
1,963
0
2,312
1,982
0
2,107
1,673
1,524
461
-276
-1,439
3,700
2,719
Capital investment
Startup costs
Depreciation schedule
Net working capital turnover
Tax rate
Discount rate
4,000
1,500
40%
8%
Revenue
Adv Seal
Premium+Basic
Incremental Revenue
Gross profit
Adv Seal
Premium+Basic
Incremental gross profit
Incremental advertising exp
SG&A expenses
Depreciation
Incremental EBIT
Taxes
NOPAT
Net working capital
Net PP&E
Free Cash Flow
NOPAT
+ Depreciation
- Capital expenditures
- Investment in NWC
Free cash flow
Discounted value
NPV
IRR
1,500
4,000
1,439
-6,339
-6,339
1,998
20.3%