Finance Case Study. General Motors

General Motors Sample Case Study

Property of General Motors Finance June 2, 2014 Page 1

Next Generation Chevrolet “Car”

Instructions

You have 1 hour and 30 minutes to complete the case below, which involves building an Excel model and

preparing a written memo. You will walk through your analysis as part of the interview process. The GM team

will ensure your case material makes its way to the proper interview room.

By the end of the allotted time, you should:

 Write a memo in Word no longer than one page outlining your analysis of the case problem and your recommendation

 Be prepared to walk your interviewers through your Excel model and present your recommendation (you can use either the Excel or the Word document as back up for your discussion; no need to prepare a

Powerpoint presentation).The discussion of the case with Q&A will take approximately 30 minutes.

 Type your name in top left corner of both the Excel and Word document

 Save the Excel and Word document on your desktop with the following name:

Case

Background

It is January 2010 and General Motors is considering the development of the next generation Chevrolet “Car”, a

full-size family sedan.

Full-size sedans are a mainstay in the American market. According to the US government classification, a full-

size car, or a “large” car, has 120 or more cubic feet of space for passengers and cargo. Adoption of the term

“full-size” in the early 1960’s was necessitated by an increasingly larger variability of car sizes and body styles.

Full-size sedan segment size fluctuated significantly over the last 50 years. Oil shocks of the 1970’s impacted

sales negatively, and so did the introduction of many other family-friendly car body styles in the 1980’s and

1990’s, such as minivans and family SUVs. The last five years have seen a renaissance in the budget-oriented

fuel-efficient segment of full-size sedans with all the traditional entrants such as Ford Taurus, Chevrolet “Car”,

Toyota Avalon, and Nissan Maxima, as well as new players such as Hyundai Azera, all competing for the title of

the ultimate large sedan. Other family-friendly car body styles like small and large cross-over vehicles (vehicles

built on a car platform, but providing the utility of an SUV) have also increased in popularity in recent years.

Chevrolet “Car” has a storied history in the full-size sedan market. The first “Car” launched as a 1958 model year

vehicle. In its heyday in the 1960’s, “Car” was the best-selling car in the United States. “Car’s” current 9 th

generation has market share of ~18% and consistently sold more than 100,000 units per year on average from

2008 to 2009, the latest full year of data available.

General Motors Sample Case Study

Property of General Motors Finance June 2, 2014 Page 2

Assignment 1: Direct Cash Flow Analysis

As an analyst in Operations Finance, your manager has asked you to create an Excel model with a direct cash

flow forecast for the next generation “Car” using the information below. Prepare yourself to walk your

interviewer through your Excel model and calculations.

Assumptions:

For simplicity, assume all cash flows occur at year end and there are no working capital requirements.

1. Development cycle (design and engineering of the vehicle before going to market)

 5 year development cycle

 Investment in manufacturing equipment and tooling: $450M a. Investment Timing (15% of the total spend in 2010, 20% in 2011, 20% in 2012, 20% in 2013 and

25% in 2014):

 Engineering budget: $390M (timing same as investment spend) 2. Sales

 Assume product is launched the year right after the end of the development cycle

 Life cycle of the product: 5 years of sales after vehicle is launched

 Total market for full-size sedans in the U.S.: 600K units a year

 Expected market share: 18%

 Two different trims are planned for the product: – Standard: 65% of total sales; selling price (MSRP) of $27,000 with a 4-cylinder engine (27 MPG fuel

economy)

– Luxury: MSRP of $37,000 with a 6-cylinder engine (16 MPG fuel economy)

 GM’s revenue per vehicle is after 10% dealer discount from MSRP which dealers typically receive on every sale

 The pricing unit is planning to reduce the price of the vehicle by 2% per year as the new generation of “Car” matures in the marketplace

3. Variable costs

 Material costs – Standard: $16,000 per vehicle – Luxury: $19,000 per vehicle

 Logistics and Warranty cost (includes freight in and out of the plant and to the dealer lot as well as warranty expenses): additional $1,500 average per car

 Manufacturing cost per unit is calculated at $4,500 per unit, irrespective of the model manufactured

 Assume 3% reduction in material, logistics, and manufacturing cost per year over the lifecycle of the car as the supplier base becomes more efficient and raw material and manufacturing costs are optimized

4. Other costs

 Total advertising and marketing budget for the car is $150M in the first year of launch, $75M in each of years 2 to 4, and $125M in year 5

Assignment 2: Recommendation

Based on the projections you derive in Assignment 1, make a recommendation on whether or not to proceed with

this discrete product program, the launch of the new generation “Car”.

As part of your recommendation, calculate the project’s NPV (using 15% discount rate). In addition to the

projections derived in Assignment 1 and the NPV analysis, make sure to use additional analytical and/or

qualitative arguments to support your position.

Prepare a one page written memo outlining your analysis and be prepared to present your recommendation to

your interviewer.

General Motors Sample Case Study

Property of General Motors Finance June 2, 2014 Page 3