Thursday, June 18, 2009

Saab - a negative NPV project.

I'm wrapping up teaching financial management of corporations to MBAs - the last class is tonight (my Monday and Thursday nights will be so empty!).

In class we have talked a lot about NPV as a decision rule for evaluating projects and the recent news of GM's sale of Saab made me wonder what GM's original 2000 NPV analysis of Saab looked like (assuming that there was one). I'm guessing that there wasn't one. But I bet that if there was, they used GM's cost of capital and not a far higher one that a risky division like Saab would merit. Rick Wagoner stated in 2000 that ''The brand attracts a very different consumer than we normally see in General Motors showrooms ..... We want to keep that brand very distinctive and very unique.'' Sounds risky to me.

But by 2002 things looked pretty grim. Indeed, GM admitted that Saab never made money and Rick Wagoner said of Saab "you have to play the cards you're dealt". Wow, what a lame excuse when considering that GM picked the cards it was dealt.

Unfortunately, the US tax payer is now playing those cards.