Staged Entry Analysis

chapter_21-final.ppt

CASE 21

NATIONAL REHABILITATION CENTERS

(Staged Entry Analysis)

Introduction

3 Key Learning Points (KLPs)

Introduction

An initial one to commit a small amount of funds for a trial (test market) program

Depending on trial results, a follow-on to commit a larger amount of funds to “go national”

The primary goal of this case to increase your capital budgeting skills, particularly those related to staged entry and decision tree analysis.

The spreadsheet model for this case uses cost and revenue data to calculate the NPVs associated with:

Stage 1 (trial investment)

Stage 2 (full investment)

Combined Stages 1 and 2 (entire proposal)

Spreadsheet Model

KLP 1: Advantages of staged entry

A staged entry strategy can both reduce the amount of the initial investment and give managers better information before additional funds are committed.
In general, a project structured in stages will be costlier than if done all at once. However, the use of stages enhances control and thus reduces risk.
However, staged entry may lessen a competitive advantage.

KLP 2: The use of decision trees

Decision trees are particularly useful when a project has multiple decision points.
Decision trees can be used to estimate a project’s:
Expected profitability
Stand-alone risk
Abandonment implications

KLP 3: Abandonment value

Often, projects can be abandoned (stopped after they have been initiated).
Abandonment should occur only if the abandonment value is greater than the value of continuing the project.
The abandonment option can:
Increase expected profitability
Decrease project risk