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Stratsim Management Simulation – Advanced Technology Investment Analysis Using Net Present Value (NPV)

Graduate-Level Practical Guide

Introduction

Welcome to this session on strategic decision-making within the Stratsim Management Simulation, specifically focusing on evaluating investments in vehicle technology. Our objective today is to demystify the "Technology" decision page by guiding you through a structured financial model using Net Present Value (NPV) analysis.

This session will enable you to:

• Build a spreadsheet to analyze technology investments

• Forecast sales and cost savings

• Calculate cash flows and present value

• Interpret the investment’s economic viability

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Step 1: Understanding the Technology Page

In Stratsim, the Technology page presents several upgrade options—such as improvements in interior styling, safety, and quality. Each upgrade has an associated capital outlay, typically incurred in Year 0.

As a manager, your task is to determine whether each investment is justified by the future cost savings it generates. To evaluate this rigorously, we’ll construct a spreadsheet model that quantifies the investment’s benefits using NPV.

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Step 2: Spreadsheet Setup

Create a spreadsheet with the following columns:

Year	Capital Outlay	Estimated Sales (k units)	Savings per Vehicle ($)	Total Savings ($M)	Discount Factor	Present Value ($M)

Key conventions:

• Capital Outflows are negative values (investments).

• Savings are positive inflows (benefits).

• All monetary values are in millions of USD, matching Stratsim’s reporting format.

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Step 3: Define Input Assumptions

1. Initial Investment (Year 0):

   • Assume a one-time outlay of $1.884 billion, represented as -1884 in the spreadsheet (in millions).

2. Estimated Sales (Year 1):

   • Assume initial unit sales of 450,000 vehicles → 450 (in thousands).

3. Savings per Vehicle:

   • Technology implementation leads to cost reductions per unit.

   • Suppose the savings is $455 per vehicle.

4. Industry Growth Rate:

   • Use 5% annually, based on historical data or provided simulation assumptions.

5. Market Share Gain:

   • Assume an aggressive market strategy capturing 2% additional market share per year.

6. Discount Rate:

   • Use 6%, based on the company’s cost of debt or minimum required return.

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Step 4: Projecting Sales and Cash Inflows

From Year 1 onward, calculate the estimated sales growth using the compound growth formula:

$$\text{Sales}_{t} = \text{Sales}_{t-1} \times (1 + \text{Industry Growth} + \text{Market Share Gain}) = \text{Sales}_{t-1} \times (1 + 0.05 + 0.02) = \text{Sales}_{t-1} \times 1.07$$

Then compute:

$$\text{Total Savings (Year t)} = \text{Estimated Sales}_{t} \times 1,000 \times \text{Savings per Vehicle}$$ $$\text{In Millions} = \frac{\text{Total Savings}}{1,000,000}$$

For example, in Year 1:

$$\text{Total Savings} = 450,000 \times 455 = 204,750,000 \Rightarrow 204.75 \text{ million USD}$$

Repeat this for each year over a 5–7 year planning horizon.

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Step 5: Calculating Present Value (PV) of Future Cash Flows

Apply the Present Value formula to each year’s cash inflow:

$$\text{PV}_t = \frac{\text{Cash Flow}_t}{(1 + r)^t}$$

Where:

• $r$ = discount rate (6%)

• $t$ = number of years from Year 0

Do this for each year’s inflow, and calculate:

$$\text{NPV} = \sum_{t=1}^{n} \text{PV}_t + \text{Investment (Year 0)}$$

If NPV > 0, the investment creates value for the firm and should be pursued.

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Step 6: Interpretation and Strategic Timing

In our example, if your total discounted cash inflows exceed the $1.884 billion outlay, then:

• The NPV is positive, indicating a profitable investment.

• Implementing the technology as early as possible maximizes accumulated savings over time.

• Delaying investment reduces the benefit due to fewer periods of accumulated cost savings.

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Summary of Key Takeaways

Component	Value/Assumption
Initial Investment	$1.884 billion
Initial Sales Volume	450,000 vehicles
Savings per Vehicle	$455
Growth Rate (Total)	7% annually
Discount Rate	6%
Evaluation Metric	Net Present Value

Conclusion:
This structured approach enables you to remove guesswork and make evidence-based decisions. By following this NPV framework, you can justify whether a technology upgrade aligns with your firm's financial goals and long-term strategy.

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