In May 2008, the Procter & Gamble (P&G) North America Oral Care group was considering the launch of a new Crest White Strips line, Advanced Seal. The product improves existing at-home tooth enamel whitening treatments, providing better adhesion to the teeth and thus better whitening results. The group is concerned about the willingness of customers to adopt the new line and the effect the new line will have on existing P&G whitening products.
Your task is to build a model to forecast the expected incremental cash flow from the initiative, with particular attention paid to the cannibalization of existing whitening business. The case in your textbook provides several alternative scenarios for launching the business. Your research report is expected to comment on the value implications of each scenario. This case provides a good blend of both finance and marketing tools.
Produce a substantial and detailed research report (essay) that addresses the following key questions:
1. What is the situation at P&G, and what is the company’s motivation for the Advanced Seal launch?
2. Does the project appear economically viable? Why or why not? Provide detailed examples.
3. Which strategic proposal do you find most appealing?
4. What are the key value drivers of Advanced Seal investment?
5. What recommendation would you make to Roman for P&G’s investment in Advanced Seal?
You should use details from the case as presented in the textbook, and the attached spreadsheet will also be valuable for conducting your research and analysis:
Case_22_Procter_and_Gamble_F1670X.xlsx
Note: Do not simply repeat the questions and provide a short answer after the question. Your final product must be a properly formatted, professionally written research report in essay format, with a clear introduction, body, and conclusion. Use descriptive subtitles to organize your report and let the reader know which question you are addressing.
Upload your completed research report in MS Word format only.
You should perform a substantial amount of research for this assignment and be sure to properly document your sources with APA-style citations and a reference list. Paraphrase main points from your sources in your own words and apply the knowledge you have gained. Although there is not a specific page count or word count for this assignment, if your report is less than two pages (double-spaced, Times New Roman, 1-inch margins), you have not done a thorough job. Write as much as you need to address the key questions, but do not add “fluff” or simply repeat what is already stated in the textbook.
Assignment Grading Criteria:
Thoroughly answered all the questions: 60 points possible thoroughly answered
Spelling/Grammar at the college level: 20 points possible
References for course material: 20 points possible
This case asks you to build a capital-budgeting model that forecasts the incremental cash flows from launching Crest White Strips Advanced Seal, then judge each launch scenario on the value it creates. The trick the case is testing is cannibalization: a chunk of Advanced Seal’s sales will come from P&G’s own existing whitening products, so those lost profits must be subtracted before you can call the project a winner. Here is how to approach it.
Key takeaways
- Model incremental cash flows only — the difference the launch makes, not total company sales.
- Treat cannibalization as a cost: subtract the lost contribution margin from products customers would have bought anyway.
- Build free cash flow as EBIT(1−tax) + depreciation − capital spending − change in net working capital.
- Discount at P&G’s cost of capital and compare scenarios on NPV first, then IRR and payback.
- Run sensitivity and scenario analysis on adoption rate and cannibalization — that is where the real argument lives.
Step 1: Set up the incremental cash-flow model
Only cash flows that change because of the launch belong in the model. For each year of the forecast horizon, estimate unit sales of Advanced Seal, price, and variable cost to get a contribution margin, then subtract incremental fixed costs (marketing, promotion, added overhead). Ignore sunk costs such as R&D already spent — they do not change with your decision.
Step 2: Handle cannibalization explicitly
This is the heart of the case. Ask: of every unit of Advanced Seal sold, how many would have been a sale of an existing Crest White Strips product? Multiply those cannibalized units by the lost contribution margin of the old product and subtract it. If you skip this, you will overstate the project’s value dramatically. The case scenarios differ largely in how aggressive the cannibalization assumption is, so keep the percentage as a visible input you can flex.
Step 3: Convert to free cash flow
From incremental operating profit (EBIT), compute: FCF = EBIT × (1 − tax rate) + depreciation − capital expenditures − change in net working capital. Add depreciation back because it is non-cash; subtract the investment in inventory and receivables the new line requires. Lay this out year by year in a spreadsheet so every assumption is a cell you can trace.
Step 4: Discount and decide
Discount the yearly FCFs at P&G’s weighted average cost of capital to get net present value (NPV). A positive NPV means the scenario creates value. Also report internal rate of return (IRR) and payback for context, but let NPV lead your recommendation. Build a terminal value only if the case expects cash flows beyond the explicit forecast.
Step 5: Test the scenarios and write the report
Run each launch scenario through the same model and tabulate the NPVs side by side. Then do sensitivity analysis: how does NPV move as the adoption rate and cannibalization rate change? Present a one- or two-variable data table or tornado chart. Your written report should open with a recommendation, summarize the model and key assumptions, present the scenario comparison, discuss the cannibalization risk and marketing adoption dynamics, and close with the value implications and what P&G should do. Put detailed tables in an appendix and reference them in the text.
Common pitfalls
Including sunk costs; forgetting working capital; discounting at the wrong rate; and — most often — ignoring or lowballing cannibalization. Label every assumption and cite the case figures you used.