A.Y. 2025/2026
BSc in Digital Economics and Finance
Dago Alessandro Lazzarini – 2515496
Level B$
Module Title:
Assessment Type: Individual Report
CASE STUDY: AI ROBOTICS
1.
Financial Performance: Gross Profit, EBIT and Unlevered Net Income
Gross Profit = Total revenue - COGS
Total Revenue = Sales units x Wholesale price
COGS = Sales units x Production cost
EBIT = Gross Profit - (R&D + Software Team + Marketing + Depreciation)
Unlevered Net Income = EBIT × (1 - Tax Rate)
Year 1
Year 2
Year 3
Year 4
300,000
350,000
400,000
390,000
Total Revenue (in € Millions) 209.70
244.65
279.60
233.61
COGS (in € Millions)
90.00
94.50
97.20
85.29
Gross Profit (in € Millions)
119.70
150.15
182.40
148.32
Operating Expenses* (in €
Millions)
(15.00)
(7.50)
(7.50)
(3.50)
Depreciation (in € Millions)
(11.00)
(11.00)
(11.00)
(11.00)
EBIT (in € Millions)
93.70
131.65
163.90
133.82
Tax (20%)
(18.74)
(26.33)
(32.78)
(26.76)
Unlev. Net Income (in €
Millions)
74.96
105.32
131.12
107.06
Total Sales
*Includes marketing and support. Year 0 sunk costs ($13.925M) are handled in the FCF analysis.
2. Cannibalization and Lost Opportunity
The "indirect" effects are significant because the new product is highly successful and displaces
60% of the older model's sales.
Pre Tax Gross Profit lost = (Sales x wholesale price x cannib.%) - (Sales x Prod cost x cannib.%)
= Sales x cannib% x (wholesale price - prod cost)
After-Tax Cannibalization = Pre Tax Gross Profit lost x (1- Tax Rate)
Lost Rent (After-tax) = Rent per year × (1-Tax Rate)
Year 1
Year 2
Year 3
Year 4
Unlev. Net Income
74.96
105.32
131.12
107.06
Cannibalization (After-Tax)
(35.86)
(41.83)
(47.81)
(46.61)
Lost Rent
(0.10)
(0.10)
(0.10)
(0.10)
Adjusted Net Income
39.00
63.39
83.21
60.35
3. Net Working Capital (NWC) and Free Cash Flow (FCF)
NWC Balance = Receivables − Payables
Accounts Receivable = 15% × Total Revenue
Accounts Payable = 15% × COGS
NWC = 15% × Gross Profit
ΔNWC = NWC this year − NWC last year
FCF = Adj. Net Income+Depreciation−CapEx−ΔNWC
Year 0
Year 1
Year 2
Year 3
Year 4
Receivables
31.46
36.70
41.94
35.04
Payables
13.50
14.18
14.58
12.79
NWC Balance
17.96
22.52
27.36
22.25
ΔNWC
17.96
4.56
4.84
(5.11)
Adjusted Net Income
39.00
63.39
83.21
60.35
Depreciation
11.00
11.00
11.00
11.00
CapEx/R&D
(68.93)
0
0
0
0
Free Cash Flow
(68.93)
32.04
69.83
89.37
76.46
4. NPV Calculation and Assessment
The cost of capital represents the minimum required return, while the discount rate is the rate used
to discount cash flows. Since the project has the same risk as the firm’s existing projects, the
appropriate discount rate is the cost of capital.
NPV = -C0 + C1/1+r1 + C2/(1+r1)(1+r2) + …
Year 0
Year 1
Year 2
Year 3
Year 4
(68.93)
32.04
69.83
89.37
76.46
Annual CoC
6%
6.5%
7%
8%
Calculation (1+rn-1)/1+rn
1/1.06
0.9434/1. 0.8858/1. 0.8279/1.
065
07
08
Discount Factor
0.9434
0.8858
0.8279
0.7665
Present Value
30.23
61.86
73.99
58.61
(38.70)
23.16
97.15
155,76
Cash Flow (FCF)
Net Present Value (NPV)
(68.93)
The project is highly valuable. Despite the increasing cost of capital and high cannibalization, the
project yields an NPV of over €155M.
5. Break-Even Analysis (BEA)
To perform the Break-Even Analysis (BEA), we calculate the specific point at which the company
P&L equals exactly zero for each variable. For this case we calculate the cumulative BEA across
Year 1
Year 2
Year 3
Year 4
Total
Sales
300,000
350,000
400,000
390,000
1,440,000
Wholesale price
699 €
699 €
699 €
599 €
674 €
Prod Cost
300 €
270 €
243 €
218.7€
258 €
Cannibalization
149.40€
149.40€
149.40€
149.40€
149.40€
Net Unit Margin
199.68€
223.68€
245.28€
184.72€
213.30€
all 4 years
Total fixed cost = 103 Million €
For the Break-Even Units we consider the total sales volume, average unit margins and total fixed
costs of the project.
Break-Even Units = Total Fixed Costs / Net Unit Margin = 482,798 Units
For the Break-Even Wholesale Price we have to find a new net unit margin re-add the 20% tax fee,
the cannibalization and the average production cost of a single unit
Break-Even Wholesale Price = ((Fixed Costs / Units) / 0.8) + Cannibaliz + Prod Cost = 496.80€
For the Break-Even Production Cost we can use a similar formula where we subtract from the
wholesale price the new minimum net unit margin, untaxed and before cannibalization
Break-Even Prod Cost = Wholesale Price - (((Fixed Costs / Units) / 0.8) + Cannibaliz) = 435.19€
For the Break-Even Cost of Capital in this case, as we are evaluating a project, we can use the
formula where we put the NPV=0 to calculate the IRR
0 = -C0 + C1 / (1 + IRR)^1 + C2 / (1 + IRR)^2 + C3 / (1 + IRR)^3 + C4 / (1 + IRR)^4
With IRR 70% the project still has a positive NPV.
This project seems very profitable, it reaches BE with low sales volumes, the average production
cost has a 40% margin and the cost of capital would have to increase almost 10 times before the
project's NPV would hit zero.
The most critical variable is the price fluctuation, as the changes made in Wholesale Price have
the highest impact on NPV.
6. Alternative Manufacturing Plan
The Chief Operating Officer (COO) is considering an alternative manufacturing plan for the
product, at a cost of 80%, this option requires 20.0 million euros in upfront operating expenses
To evaluate whether the in-house production is a preferable option we have to calculate the BE
Units with the new total costs, average unit production cost and net unit margin
Item (in € Millions)
Year 1
Year 2
Year 3
Year 4
COGS Savings (20%)
+18.00
+18.90
+19.44
+17.06
Tax on Savings (20%)
(3.60)
(3.78)
(3.89)
(3.41)
After-tax Savings
14.40
15.12
15.55
13.65
Inventory Build (NWC)
(15.48)
(1.13)
(0.67)
21.32*
Incremental FCF
(8.10)
13.99
14.88
34.97
Total costs reach 123 Million €, prod cost per unit drops to 206.40€ (80% of the previous), making
net unit margin more profitable at 254.56€.
The updated Break-Even Units is 483,187, less than 1,000 more units than the previous BE
To be sure if In-house is better, we also calculate the incremental cash flow
New Cash Flow (FCF)
23.94
83.82
104.25
111.43
Annual CoC
6%
6.5%
7%
8%
Discount Factor
0.9434
0.8858
0.8279
0.7665
Present Value
22.58
74.25
86.31
85.41
(66.51)
7.74
94.05
179.46
Net Present Value (NPV)
(89.08)
(89.08)
In-house is preferable, the NPV increases by around 22 Million € and with the expected volumes,
the 20% margin improvement is so massive that it easily recovers the 20 Million € reorganization
fee and the high inventory carrying costs within the first two years.
7. Alternative Pricing Strategies
Price Reduction Strategy
Year 1
Year 2
Year 3
Year 4
375,000
435,000
500,000
485,000
Total Revenue (in € Millions) 224.63
260.57
299.50
242.02
COGS (in € Millions)
112.50
117.45
121.50
106.07
Gross Profit (in € Millions)
112.13
143.12
178.50
135.95
Operating Expenses* (in €
Millions)
(15.00)
(7.50)
(7.50)
(3.50)
Depreciation (in € Millions)
(11.00)
(11.00)
(11.00)
(11.00)
EBIT (in € Millions)
86.13
124.62
160.00
121.45
Tax (20%)
(17.23)
(24.92)
(32.00)
(24.29)
Unlev. Net Income (in €
Millions)
68.90
99.70
128.00
97.16
Cannibalization (After-Tax)
(44.82)
(51.99)
(59.76)
(57.98)
Total Sales
Lost Rent
(0.10)
(0.10)
(0.10)
(0.10)
Adjusted Net Income
23.98
47.61
68.14
39.08
Year 0
Year 1
Year 2
Year 3
Year 4
NWC Balance
16.82
21.47
26.78
20.39
ΔNWC
16.82
4.65
5.31
(6.39)
Adjusted Net Income
23.98
47.61
68.14
39.08
Depreciation
11.00
11.00
11.00
11.00
CapEx/R&D
(69.08)
0
0
0
0
Free Cash Flow
(69.08)
18.16
53.96
73.83
56.47
Cash Flow (FCF)
(69.08)
18.16
53.96
73.83
56.47
Annual CoC
6%
6.5%
7%
8%
Discount Factor
0.9434
0.8858
0.8279
0.7665
Present Value
17.13
47.80
61.12
43.28
(51.95)
(4.15)
56.97
100.25
Net Present Value (NPV)
(69.08)
Price Increase Strategy
Year 1
Year 2
Year 3
Year 4
Total Sales
220,000
260,000
290,000
250,000
Total Revenue (in € Millions)
175.78
207.74
231.71
174.75
COGS (in € Millions)
(66.00)
(70.20)
(70.47)
(54.68)
Gross Profit (in € Millions)
109.78
137.54
161.24
120.07
Operating Expenses* (in € Millions) (15.00)
(7.50)
(7.50)
(3.50)
Depreciation (in € Millions)
(11.00)
(11.00)
(11.00)
(11.00)
Year 0
Year 1
Year 2
Year 3
Year 4
NWC Balance
16.47
20.63
24.19
18.01
ΔNWC
16.47
4.16
3.56
(6.18)
Adjusted Net Income
40.63
64.05
79.43
54.48
Depreciation
11.00
11.00
11.00
11.00
CapEx/R&D
(69.08)
0
0
0
0
Free Cash Flow
(69.08)
35.16
70.89
86.87
71,66
EBIT (in € Millions)
83.78
119.04
142.74
105.57
Tax (20%)
(16.76)
(23.81)
(28.55)
(21.11)
Unlev. Net Income (in € Millions) 67.02
95.23
114.19
84.46
Cannibalization (After-Tax)
(26.29)
(31.08)
(34.66)
(29.88)
Lost Rent
(0.10)
(0.10)
(0.10)
(0.10)
Adjusted Net Income
40.63
64.05
79.43
54.48
Cash Flow (FCF)
35.16
70.89
86.87
71,66
Annual CoC
6%
6.5%
7%
8%
Discount Factor
0.9434
0.8858
0.8279
0.7665
Present Value
33.17
62.80
71.92
54.93
(35.91)
26.89
98.81
153.74
Net Present Value (NPV)
(69.08)
(69.08)
Moving from the baseline to Price Reduction Strategy is a major value-destroyer, even if revenue
is higher, losing about €55 M in NPV as the high volume of units triggers massive cannibalization
and creates a high burden on Net Working Capital, which drags down the Free Cash Flow.
Moving to the Price Increase Strategy, it only loses €1.87 M in NPV compared to the baseline.
While the NPV is slightly lower, the single unit margin is significantly higher, requiring Strategy 2 to
sell fewer units to hit the BE. This reduces operational risk, marketing spend, and pressure on your
supply chain but increasing the risk of not reaching the expected performance due to the volume
sensitivity.
The current strategy provides the best balance between maintaining a premium brand position and
capturing enough market share.