ASSICNMENT QUESTIONS I. What is the "relevant" cost of manufacturing a Challenger bike? 2.

What is the "relevant" cost (on a per bicycle basis) of carrying the working capital investment involved in the Challenger deal? 3. Should the Challenger deal be charged for the lost sales of bikes through the regular distribution channel ("erosion" or "cannibalization" cost)? If so, what is the "relevant" erosion cha rge? 4. Can you estimate the incremental return on investment for the Challenger deal ? it is difficult to estimate the incremental return on investment for the Challen ger deal due to insufficient information. It would be difficult to predict retur n due to the uncertainty of customer retention with the implementation of this d eal.

S. What are tl.e major cash flow implications of the Challenger deal? Cash flow is a difficult situation currently for Baldwin. It takes the inventory approximately 125 days to turn and then another 46 days to get paid. This is a very long time. The Challenger deal states that they would pay within 30 days. T his would help with the current 46 day AR turnover. The contract also keeps inve ntory days from going over 120 for the Challenger bikes. Both of these help turn assets into cash faster by at least 21 days (approximately 16 + 5). The problem is they don't currently don't have cash to invest in this project, meaning they would need to finance.

6. How would you describe Baldwin's financial situation at the end of 1982? Financially, Baldwin has very high amounts of debt. Most of this is short term d ebt, which is worse than long term debt. Comparing the debt to equity we see that there is more debt than there is equity . This is a dangerous position for the firm to be in. The current ratio indicates they do have enough current assets to pay off curren t liabilities. The debt situation may make it difficult to raise the cash needed to invest in t he Challenger bikes. Baldwin currently has about an 8% ROE, which is well below the industry average of 15%. By accepting the offer and using a 50% tax rate the ROE is estimated to be around 13%, which is significantly better but still below the 15% industry av erage.

7. How would you describe Baldwin's strategic position at the end of 1982? Is th e Challenger deal a good strategic fit for Baldwin?