MBA-640 - Week 09 - Final Project

Running Head: EXTERNAL CAPITAL FUNDING PROPOSAL 1
MBA 640 – Final Project Milestone One: External Capital Funding Proposal
Donald W. Jacobs
Southern New Hampshire University

EXTERNAL CAPITAL FUNDING PROPOSAL 2
Executive Summary
The L.S. Starrett Company is a worldwide leader in the tool and precision measurements
industry. Since 1880, we have survived and thrived through economic depression, world wars,
and every domestic and global political transition imaginable. Like our tools, our company was
forged in the furnace of ambition, and quenched only with the success of our customers. Our
“eight manufacturing locations worldwide: Brazil, The U.K. and China and five in the United
States” [ CITATION Sta17 \l 1033 ], give us a unique versatility to hedge global production and
demand uncertainties. For five years, our net sales have declined, but our (adjusted) net earnings
have a healthy upward trend. Starrett needs to expand into untapped markets in order to generate
new revenues streams. With a strong vision and significant working capital, now is the time to
invest in the future by leveraging the nearly limitless production and sales capacity of India.
With more than 1.26 billion people, India’s growth rate presents a huge need for
infrastructure, housing, technology, and other needs fulfillments. Starrett products are prime for
answering those unmet needs. By expanding the sales and ultimately manufacture of Starrett
product line into India, we will tap into one of the world’s largest populations. India has a
significantly underserved population, and a greater than 10% unemployment. Relationship
building and the necessary talent acquisition and compensation requirements will be eased
compared to most other regions. With a keen eye on quality management, the business
relationships and skillsets available in India will prove useful in Starrett all aspects and locations.
Investment Project
India has ample chromium and iron ore mines feeding many mills. They produce high
quality steel and stainless steel for domestic and foreign consumption. [ CITATION MapND \l
1033 ] [ CITATION Ste16 \l 1033 ]. A prominent economic development website states that
India is “the fastest growing major economy in the world as per the Central Statistics
Organisation (CSO) and International Monetary Fund” [ CITATION IBE17 \l 1033 ]. The
world’s most powerful information gathering and analysis organization confirms that India’s
“economic growth … and a massive youthful population are driving India's emergence as a
regional and global power” (CIA, 2017). Refer to for graphic presentations comparing the U.S.,
Chinese, and Indian population growth rates and declines. The Indian population growth rate was
1.1% in 2016, compared to the U.S. with 0.7%. [ CITATION The17 \l 1033 ]. That means that in
the U.S. there were 2,244,642 people added to the population in 2016. In China 7,437,431 people
were added in 2016. In India, there were 14,546,544 people added to the population in 2016.
India added more than three times the number people to their population in 2016, compared to
the U.S. The demand for Starrett products is unmet by local vendors in India, where the products
are acquired almost exclusively through individual transactions on Amazon and other web
services. The unmet resource demands of this undervalued population will be answered by
insightful organizations. L.S. Starrett is positioned to serve and capitalize by engaging
intelligently and swiftly. It is time for L.S. Starrett to address this demand and revenue source,
directly.
Refer to Appendix 1 – The Most Likely, Appendix 2 – The Worst Case Scenario, and
Appendix 3 – The Best Case Scenario for financial comparisons for this projection. Over a
three-year period beginning in 2017, Starrett will establish sales and then manufacturing
facilities in India. This will be accomplished through a joint-venture with the preeminent Indian
tool manufacturer. (Godrej Tooling, a business unit of Godrej & Boyce Mfg. Co. Ltd., Mumbai,
India is the prime choice.) The joint-venture would tentatively be named “SGB Manufacturing
Ltd”, or “SGB”, for brevity. In the first 12 months, Starrett will leverage our existing
manufacturing and warehousing facilities in other countries to ramp up production of India’s
most requested L.S. Starrett tools, especially those that do not compete directly with the joint-
venture partner. Production will take place primarily in Starrett’s Chinese facilities,
supplemented by secondary inventories from progressively distant facilities in Singapore, Japan,
Europe, and Mexico.
Concurrently, and under the L.S. Starrett name, sales channels in India will be provided
by the joint-venture partner. SGB would later market under the licensed name of L.S. Starrett.
We will leverage the partner’s home office in Mumbia for sales and distribution in 2017,
followed by New Delhi in 2018. With a population 20.8 million people, “Mumbai ... is the
Maharashtra state capital and the biggest financial center in India. The city also is a home to the
Reserve Bank of India” [ CITATION Wor17 \l 1033 ]. Mumbia is also the home office our prime
joint-venture interest. Note that “New Delhi has been ranked first among the top 15 cities in
India with a population of 46.0 million” [ CITATION Wor17 \l 1033 ]. In the event that new
property is required to accommodate this expansion with the joint-venture partner, the properties
to be considered must provide professional office space and ample space for manufacturing,
warehousing, and logistics and fleet management within a short walking distance, if not under
the same roof. SBG will prefer to lease with the option to buy as the venture proves positive and
sustainable. Initial estimates on leasing run in the ₹140 (rupees) or $2.17 U.S. per square foot
(“sq. ft.”), per month. [ CITATION Eco17 \l 1033 ]. A 4,000 square foot sales facility leases for
roughly $9,000 per month, utilities not included. A three-year lease extends to $312,480 and is
included in the cost of goods sold numbers for 2017, 2018, and 2019 in the appended scenarios.
When Starrett extends production rights to SGB, a 25,000-30,000 sq. ft. facility will be required.
Worst case leasing costs for this facility will be $61,500 per month, $2,343,600 over three years.
SGB will ultimately build and own its facilities. Current estimates range from $18.47 to
$36 per sq. ft. for construction. [ CITATION Cos16 \l 1033 ]. That will range from $73,880 to
$144,000 for a 4,000 sq. ft. sales and distribution office, which would be significantly less than
leasing. For the manufacturing and warehousing component, the cost is estimated at $1,440,000.
This option, however, cannot be fully evaluated for practical implementation until the decision is
made to commit to SGB manufacturing in India.
SGB will contract with a marketing firm such as Pinstorm or Techshu, which are the top
two digital media and marketing firms in India. [ CITATION Dig17 \l 1033 ]. That will position
our products for anticipation of availability and rapid acceptance. With the tools priced and
marketed properly, these massive metropolitan areas will generate significant demand for Starrett
products. These facilities will serve initially as distribution centers only and enable SGB to apply
for full membership in The Indian Machine Tool Manufacturers’ Association. [ CITATION
IMT17 \l 1033 ]. Membership will facilitate regional integration and (during expansion) will
assist in finding permanent, capable staff for all levels of professional need.
Note that while an important part of the overall COGS, no import costs for new sales in
India will be included in the sales pricing or as part of the success metrics of the Indian sales.
Import costs could be as high as $500,000 in the first six to 12 months. They are presented in
Appendix 1 – The Most Likely Scenario, as Other Income (Expense). For the purposes of this
scenario comparison, the values contained in the Other Income (Expense) category of each
scenario for 2017, 2018, and 2019 are all composed solely of import costs and subsequent cost
recoveries. The idea is to get tools on the ground and selling in India at the most competitive
prices. These initial sale prices will nearly match the ultimate production and sales costs of the
future SGB manufacturing facilities. In doing this, L.S. Starrett will establish and increase
demand for the product prior to building the actual SGB manufacturing facilities.
Construction of the manufacturing facilities will not commence until product demand and
revenue trending validates the (joint-venture) business model as worthy and sustainable. If
demand and revenue do reach expected levels in the periods forecast, a reconsideration of the
manufacturing build (at a minimum) will take place.
The initial loan sought to establish this India-based joint-venture is $11,000,000 with an
option for an additional $5,500,000 spread over the second and third years. This will cover the
legal, marketing, and other joint-venture start-up costs in India as well as the temporarily
increased foreign production, transportation, and import costs. According to the U.S. Small
Business Administration (SBA) business loan rates range between 6.5% and 9%. [ CITATION
SBA17 \l 1033 ]. With no prepayment penalties, Starrett will commit to a 20-year repayment
plan and accelerate payments to a 15-year schedule. Refer to 37Appendix 4 – Loan Expectations
“Most Favorable Scenario”. At 6.5% interest, this will enable L.S. Starrett to maintain the
financial commitment of 20 years while anticipating savings of $3,652,807.42 by leveraging the
15-year payment plan. Adopting the less favorable “Alternative Scenario”, at 9.0% interest,
enables Starrett to maintain the financial commitment of 20 years while anticipating savings of
$5,505,430.30 by leveraging the 15-year payment plan. Starrett and SGB will seek Indian
economic development loans to further reduce costs and compartmentalize expenses and
revenues in the subsidiary reports.
Within three years, the entire Indian joint-venture will be self-sufficient and profitable.
Production and financial health checks will be formally assessed quarterly. There will be
monthly reporting in both GAAP and Indian Accounting Standards (Ind AS). There will be no
surprises internally or to other stakeholders. As stated, if the revenue and costs do not measure
up to the plan, the exit strategy will be reviewed and potentially invoked. As long as the
Revenue, Other Income, and Capital Investment for India perform at or above the worst-case
scenario as presented in Appendix 2 – The Worst Case Scenario, the Indian operations and build-
out will continue up through and including development of manufacturing capabilities. Failing
that, the sales and manufacturing segments will be assessed individually for performance to plan
and performance against like sectors of Starrett in other countries. With skilled and unskilled
labor and professional costs considerably lower in India there is a high probability that the Indian
operations may usurp manufacturing operations in other countries. The least cost effective and
lease efficient operations of each sector will be considered for revision, sell-off, or dismantling.
Justification
L.S. Starrett stock price has been drifting from the single digits to the $22 range and back
to single digits for more than three years. [ CITATION Sch17 \l 1033 ]. There have been no
recent and prominent revenue increases or cost curtailments. In fact, our revenue, net income,
expenses, earnings per share, and market capitalization from 2011 through 2016 reflect zero
permanent growth and with decreasing values in all general categories of our financial reports.
[ CITATION Sta17 \l 1033 ]. L.S. Starrett’s high operating costs (recently in excess of total
revenue) make the stock unattractive. The opportunity for new production in India at well below
traditional costs, coupled with the exceptional market demand for high quality measuring and
building tools in India make this investment particularly appealing. It is also time sensitive. We
must act in a measured, informed fashion but also expeditiously – before competitors make new
or extended marketing campaigns in India.

Given the population and growth rates demonstrated graphically in it is clear that India’s
population with exceed China’s in 5-7 years. In preparation for the needs of the rising
generations, India’s Ministry of Urban Development was authorized and directed to use roughly
$1.5 billion (U.S.) in a massive reinvestment in “Smart Cities” across India. “The objective is to
promote sustainable and inclusive cities that provide core infrastructure and give a decent quality
of life to its citizens, a clean and sustainable environment and application of ‘Smart’ Solutions” [
CITATION Gov17 \l 1033 ]. This will cover everything from water supplies and electrical
service, to practical housing and “robust IT connectivity and digitalization” [ CITATION
Gov17 \l 1033 ]. The investment is under way and L.S. Starrett needs to capitalize on the
regeneration and rebirth of India’s cities.
Strategic fit
“Our strategic concentration is on global brand building and providing unique customer
value propositions” [ CITATION Sta17 \l 1033 ]. L.S. Starrett has sought active revenue
opportunities wherever they exist, since the beginning. Global product demand and revenue
opportunities have been answered successfully with such facilities as “Itu, Brazil (1956)
Jedburgh, Scotland (1958) and Suzhou, China (1997). All subsidiaries principally serve the
global manufacturing industrial base with concentration in the metalworking, construction,
machinery, equipment, aerospace and automotive markets” [ CITATION Sta17 \l 1033 ]. India is
the latest rising opportunity. “If India continues its recent growth trend, average household
incomes will triple over the next two decades and it will become the world’s fifth largest
consumer economy by the year 2025” [ CITATION Mak17 \l 1033 ]. This fits perfectly into
Starrett’s expansion and market acquisition strategy. “During fiscal 2016, there were no material
changes in the Company’s competitive position. The Company’s products for the building trades,
such as tape measures and levels, are under constant margin pressure due to a channel shift to
large national home and hardware retailers. The Company is responding to such challenges by
expanding its manufacturing operations in China” [ CITATION Sta17 \l 1033 ].
The product demand remains, but profit margin demands can be met only by production
in lower cost regions such as China and India. It is clear that, “The Company expects its foreign
subsidiaries to continue to play a significant role in its overall operations” [ CITATION Sta17 \l
1033 ]. Of further interest to the company and all stakeholders, the Indian Government’s Smart
Cities program is a perfect fit with Starrett’s environment responsibility plans. We can leverage
this to work hand-in-hand with the New Delhi and federal officials of India to create or leverage
micropower-enabled facilities complimentary to the India’s massive Smart Cities investment.
“The Company takes seriously its responsibility to the environment, has embraced renewable
energy alternatives and received approval from federal and state regulators in fiscal 2013 to
begin using its new hydro – generation facility at its Athol, MA plant to reduce its carbon
footprint and energy costs, an investment in excess of $1.0 million” [CITATION Sta17 \l 1033 ].
India is the next step in the evolution and success of L.S. Starrett. As shown above,
foreign ventures are nothing new to L.S. Starrett. They have become a significant, almost
controlling factor in Starrett’s economic and business model. “The execution of these strategic
[global] initiatives has expanded the Company’s manufacturing and distribution in developing
economies, resulting in international sales revenues totaling 43% of consolidated sales for fiscal
2016” [ CITATION Sta17 \l 1033 ]. Continued globalization is mandatory to the company’s
success.
India’s Smart Cities investment(s) will plant the seeds and reap tremendous benefits for
the people of India, and the companies that get involved on the colossal infrastructure uplift. The
current Smart Cities initiative has a sunset clause built into the project. The current cycle is
intended to ramp down by 2023. [ CITATION Gov17 \l 1033 ]. By then, the L.S. Starrett name
and products will be standard fare for serious building and manufacturing projects in India.
Revenue will plateau and stabilize with the potential to decrease slightly as 2023 approaches.
Any revenue leveling will be modest, however, and will stay relatively steady at the new level.
As purchases from our initial sales to targeted construction and infrastructure industries level-off,
we will pursue heavy industry lines including suppling tools and measuring equipment to India’s
huge auto manufacturing concerns. This will augment the initial build-out and generate
additional revenue from India’s vast manufacturing base. This will fit well with India’s “Make in
India” [ CITATION Mak17 \l 1033 ] campaign. The India-made Starrett product line will be a
natural fit.
Risks
The L.S. Starrett Company has a number of ongoing decisions to make in this venture.
All of the decisions must be weighed against risk, recognizing of course that doing nothing is
also a decision and must be included in the decision-making processes. Starrett’s most significant
risks related to the India expansion project are the capacity to deliver in time to meet market
demand, and best and highest use of Starrett capital. Specifically, the time it takes to get the
project moving has to be compared to the opportunities developing India – related to India’s
population growth and economic development incentives – to be certain that targeted
opportunities do not evaporate before the project has economic traction and fruition in India. The
risks expressed above are actually larger risks, or risk categories in reality, however. Within
them lay an overabundant and ripe set of key risks to be weighed and vetted. They are both
internal and external risks and include: how to legally establish the business, dealing with
construction and remodeling permits, getting electricity and other utilities, registering property,
getting India-based credit, protecting investors and enforcing contracts, paying taxes (knowing
what and when), trading across India’s borders, resolving insolvency and various business
relations, and culture. [ CITATION TMF16 \l 1033 ] Add to this that there is a certain
expectation to navigate through various Facilitation Payments, which has yet to be fully
discovered and mitigated. [ CITATION USF98 \l 1033 ] [ CITATION Raj17 \l 1033 ].
Internal Risks
The most critical internal risk is a grouping of (non-personnel related) local and cultural
demands, and legal requirements. Issues and risks like a failure to plan for and accommodate
permitting, taxing, acquisitions, transports, and facilitation costs, as well as proper precautionary
measures to protect investments and contracts, including enforcement could be devastating. The
expectation of fully reasoned and responsible judiciary practices would be a “rookie mistake”
that could capsize and sink the entire project as a total loss. Local expert legal representation will
be retained with a qualified portfolio of high performance successes. This relationship will also
be leveraged specifically for their independent decisions and funding of facilitation fees, as
required. It must be noted that this risk and associated costs were not incorporated in the original
costing forecast, which will be reevaluated and restated. Total legal costs are expected to be in
the several hundred thousand (U.S.) dollars (possibly per year) over an initial period of five
years, with sustained costs to be lower. The legal costs for this risk category have been rectified
in the revised financial forecasts, under the heading of Legal and HR: India. The legal firm will
mitigate concerns for leasing, and corporate structure and process at the onset, which will
consume the majority of the legal fees above. This corporate structuring will be a blend with the
Starrett mission and goals, so that the operation is properly oriented from day one. The risk of
improper alignment, intentions misunderstood by local government officials, labor law
compliance, and transportation law and contracts are just a few of the structure requirements that
will have to be fully vetted and established prior to any India-based L.S. Starrett sales or
manufacturing door opening. This leads to the second tier of internal risks.
Culture in personnel and impact is recognized as the second most significant internal risk.
It is viewed as internal, because it is incumbent upon Starrett to recognize this and prepare for it;
it is not for the local society to embrace L.S. Starrett after the fact. The U.S. is a monochronic
society and workplace, despite the fast pace. Among other differences, India is polychronic.
Starrett has a successful history of adapting to these needs and practices with operations in Latin
American and Asian regions already. Each region, however, must be recognized for its unique
practices and demands. Hiring the right people will make all the difference. Starrett and its
products enjoy a stellar reputation. Employees at all levels of the India operations must be well
versed in the L.S. Starrett philosophy and mission. Quality and customer service are everything.
“When an organization creates a new position, it incurs costs to develop a job description and
salary structure” [ CITATION Grend \l 1033 ]. Every position and expectation must be
scrutinized for appropriateness, and managed to success. Starrett will be creating all new
positions, specific to the new operations and environment, and must execute this well. This will
require local expertise from organizations that understand and capitalize on the fact that “India is
a cultural hotbed, and business is more about building relations than presenting figures and sums.
The polychronic culture can be difficult to adapt to for outsiders, and due diligence into the
destination is important” [ CITATION TMF16 \l 1033 ]. While the assimilation efforts must be
initiated and led by Starrett, it must work in both directions in order to be effective. Once the
India operations are up and running, if employee turnover becomes an issue it could cost as
much as 2.5 times an individual’s annual wages to train a replacement employee.[ CITATION
Grend \l 1033 ]. This is due to the technical and professional requirements of the employees, as
well as the performance draw that the subsequent on-the-job training will place on the remaining
employee base. Executing this well, with external local expertise will reduce risk and enable the
organization to start hitting stride early in the project. Clearly, there will be turnover, but it will
be mitigated significantly by advanced engagement. This risk was originally expected to be
mitigated by membership and participation in the India Machine Tool Manufacturers
Association. Like the legal costs highlighted previously, this risk and cost oversight is rectified
and addressed in the revised financial forecasts, under the heading of Legal and HR: India.
External Risks
Economic and political risks must be recognized as the two most dominant external risks.
[ CITATION Per17 \l 1033 ]. There are several components within these categories, and many
can have overlapping affiliations. In general order of perceived magnitude of impact, the top
subcategories of economic and political risks for India include: large-scale involuntary
migration, water crises, severe energy price shock (increase or decrease), interstate conflict with
regional consequences, unemployment / underemployment, extreme weather events, failure of
climate change mitigation and adaptation, major natural catastrophes. [ CITATION Wor16 \l
1033 ]. Arguably, the order – which was created by surveying 750 experts worldwide
[ CITATION Wor16 \l 1033 ] – could be reinterpreted by anyone. Clearly, several of these
would be out of Starrett’s span of control.
Areas and indicators of which to be mindful and influential on the Starrett decision tree(s)
include India’s GDP and trending, S&P and/or Moody’s ratings, understanding the market
(developed versus emerging versus frontier), and diversity. [ CITATION Per17 \l 1033 ]. India’s
“government debt level declined to 67.5 percent of gross domestic product in 2016 from 84.7
percent in 2003” [ CITATION Blo17 \l 1033 ]. That is a very good sign, but enough. India’s
Moody’s rating is Baa3 Positive. [ CITATION Moo17 \l 1033 ]. This rating is a “medium-grade
credit risk which may have speculative characteristics … Moody’s India rating is … the lowest
on that rung” [ CITATION Blo17 \l 1033 ]. These aspects must be monitored as, “A country
with stable finances and a stronger economy should provide more reliable investments than a
country with weaker finances or an unsound economy” [ CITATION Per17 \l 1033 ]. Since India
is a country with higher but manageable risk, the returns should be higher as well.
Assessing political risk for India would focus on the standard expectations of start-up
including any level of government that may apply facilitation requirements, but in a broader
view, it will focus on the country’s intentions to remain hospitable to foreign investment and
foreign business. With this as the backdrop, Starrett will focus startup and operational objectives
around making the India-based operations as wholly local and authentic as possible. This must
be perceived as an Indian company and it should genuinely operate as such. India is moving
dramatically forward with its outreach for foreign investment. Indian average household incomes
are expected to triple in the next decade because of their policy. India is a rising star in the world
economy, due largely to the fact that their “[p]olitical stability and broad consensus on reforms is
also a big pull for expanding companies” [ CITATION TMF16 \l 1033 ].
The external risk findings do not create a notable inflection on the financial forecasts.
Rather, they support the earlier decision to investigate India as a country into which L.S. Starrett
should seek to expand.

Microeconomic
Assess the microeconomic factors that might affect decisions about the proposed
investment. Support your response with specific examples. For example, how competitive is the
market you will be entering? How elastic is the price for your product or service?
Microeconomic risks and resulting decision-making rely on a series of inputs including
basic logic, the nature of the competition and their activities, and the state of the economy. The
latter was addressed previously. Logic means understanding the dynamic relationship between
costs (fixed and variable) and revenues. This will help Starrett’s management determine the
actions to take. Simply put, marginal revenue must equal or exceed marginal cost.
A number of microeconomic factors and risks affect revenues and expenses. Some
factors include the market type (monopoly, oligopoly, or perfect competition), labor pool,
specific product sales histories, advertising campaigns, and economic indicators and forecasts
that will affect debt variables. In general, L.S. Starrett will be entering a perfect competition
market, as there are already a number of manufactures selling tools in India. The high-end tool
manufacturing and sales sector is less competitive as there are fewer participants. It is still a
perfect market however, hence the mandate that Starrett sell product in India at its standard sales
price in other countries, based on COGS, freight on board, at the non-Indian manufacturing
facilities. The import costs cannot be applied to the tools sold in India or the tools will be priced
too high. The resulting sales will be the indicator(s) for review in the decision to build
manufacturing facilities in India. This practice will also undersell the Amazon and related
Starrett tools sales channels in India, as they all include distributor markup and shipping costs.
When sales go up as a result the decision tree to move to the affirmative, setting stage for the
next decision set.

According to the CIA World Fact Book [ CITATION CIA17 \l 1033 ] the industrial
production growth rate (that is, the annual percentage increase in industrial production, including
manufacturing, mining, and construction) was 7.4%, there was a labor force of 513.7 million
people, and the unemployment rate was just 5% in 2016. All of these external factors bode well
for Starrett with the exception of the low (5%) unemployment rate. Mathematically (logically),
however, that 5% means that there are roughly 25.7 million people looking for jobs – hopefully
looking for careers.
When the legal, leasing, HR and recruiting, advertising campaign, sales, and other
Starrett-specific results all prove positive, those decisions will move to the affirmative as well.
Alternate Financial: Sales Fall (20% short of or are 20% higher)
In the event that sales increase by 20% in each of the forecast years, the 2017, 2018, and
2019 profits and profit margins will increase from the original forecast of $5,450 at 2.17%,
$14,960 at 5.81%, and $25,750 at 9.75% to the new forecast of $6,050 at 2.4%, $16,660 at
6.43%, and $28,350 at 10.63%, respectively. Refer to Appendix 7 – Sales up 20% for further
details. These appear to be spectacular results, with an even greater capacity to pay off debt
sooner, an increase in earnings per share, and an expected increase in the price per share.
In the event that sales decrease by 20% in each of the forecast years, the 2017, 2018, and
2019 profits and profit margins will increase from the original forecast of $5,450 at 2.17%,
$14,960 at 5.81%, and $25,750 at 9.75% to the new forecast of $4,850 at 1.94%, $13,2260 at
5.18%, and $23,150 at 8.86%, respectively. Refer to Appendix 8 – Sales Down 20% for further
details. These results appear to be substantial and within acceptable margins as well, with a
continued capacity to pay off debt within the originally committed years, an increase in earnings
per share, and an expected increase in the price per share.

Alternate Financial: Time Value of Money
“[B]ecause the NPV approach uses cash flows rather than profits, uses all the cash flows,
and discounts the cash flows properly, it is hard to find any theoretical fault with it.”
[ CITATION Fin171 \l 1033 ]. Further, the Intern Rate of Return is build off the NPV and is
used in measuring the profitability of potential investments such as the L.S. Starrett India
Project. The Net Present Value and IRR analysis of the project presents concerns, but not
obstacles. In the Most Likely Scenario, the NPV does not return positive until the third year and
the IRR until the second year, when the present a NPV $2,825,000 value and a 13.808%,
respectively. The Sales Down 20% Scenario, does not return positive NPV in any of the first
three years. In fact, it does not return positive until the fourth year, assuming constant sale and
costs trending, when it presents a surge to a $7,122,000 value. The IRR presents positive at year
two with 7.148%. The Sale Up 20% Scenario NPV still does not go positive until the third year
and the IRR in the second year, when they present at a NPV of $6,814,000 and IRR of 20.1%,
respectively. Refer to the Appendix 9 – Net Present Values and Appendix 10 – Internal Rates of
Return, for further details. In all scenarios, the returns end in positive territory with the exception
that the 20% Sales Down scenario is protracted to a four-year requirement. In the 20% Sale
Down scenario, costs and sales will have to be monitored extremely well in order to confirm the
interest in remaining with this venture.
Justification
Financial Impact
L.S. Starrett stock activity and value has been fluctuating desperately, with a serious
downward pricing trend over the last five years. Analyzing raw data retrieved from NASDAQ
shows an average five-year price per share of $12.78, with a high of $21.80 on February 23,
2015 and a low of $7.50 on August 4, 2017. [ CITATION NAS17 \l 1033 ]. Significant swings in
daily trading volumes accompany the pricing. The average five-year daily stock volume is
11,978, with a high of 146,290 on June 2, 2017, and a low of 287 on November 25, 2016.
[ CITATION NAS17 \l 1033 ]. Even with the high price in 2015, the stock price has sustained a
downward trend of roughly 17% over the five-year period. Moreover, L.S. Starrett stock has
endured a 65.60% price freefall from its high in 2015 to its current low. Visual presentation of
this historic data and trending are available in Appendix 11 – Shares History with Trending. This
dim financial performance is partially due to high operating expenses, which have been trimmed
in the last twelve months, and a substantial charge of $1.1MM against the dollar to yuan
valuation related to the Chinese subsidiary [CITATION Sta17 \p 24 \l 1033 ] and a $17.5MM
pension charge in 2016 [CITATION Sta17 \p 23 \l 1033 ]. The net result, from all inputs, is that
the company has little free cash on hand for dividends and is therefore unattractive on the surface
as a standalone stock. L.S. Starrett’s most attractive current aspect may be for consumption by a
larger competitor. This is why Starrett needs to act quickly to anchor its own future, and India
offers the best opportunities.
The India market is, by definition, a perfect competition market for L.S. Starrett products.
There is not as much competition in the higher-end tool manufacturing and distribution sector
but it is still competitive. Therefore, it is essential for L.S. Starrett to sell in India at a price
comparable to that in other countries and at or below the competitions’ pricing inside India, from
the beginning. “Manufacturing and capital goods sectors were witnessing a weak trend indicating
growth impulses has turn around and registered healthy growth during FY 2017. We expect this
trend to continue in the current year which will have positive impact on machine tool industry”
[ CITATION IMT18 \l 1033 ]. India is a rapidly growing country both in population and in
economy, with an infrastructure that is expanding at almost the same rate. [ CITATION CIA17 \l
1033 ]. The inability for the infrastructure growth to keep pace with the population and GDP
growth indicate solid opportunities for L.S. Starrett products. Comparing facts on India’s
demographic trends with those of China (a strongly similar emerging growth country) shows that
India will pass China as the most populated country in the world within five to seven years.
[ CITATION CIA17 \l 1033 ]. Comparing India’s economic drivers, policies, and credit
worthiness with China shows a similar outpacing GDP and return on direct foreign investment.
[ CITATION Moo17 \l 1033 ]. [ CITATION Per17 \l 1033 ]. All of this means construction – in
terms of buildings, roads, utilities, and so on. This is the perfect scenario for L.S. Starrett
investment.
While the Indian GDP has slowed slightly, there is still substantial room for foreign
investment and solid return. Commentary suggests that foreign investment may have slowed
somewhat in India as a result [ CITATION IMT18 \l 1033 ] but as the GDP reinvigorates due to
increased interest (and results) of India policy improvements, continued investment will reap
sizeable results. This next phase of the improving India GDP should be viewed as a secondary
first-mover advantage, with the benefit of nearly 20/20 hindsight. This means limited
disadvantages, especially as it relates to “demand preemption, scale economies, and switching
costs” [CITATION Placeholder1 \p 154 \l 1033 ]. Add to that the fact that “An investment of
USD 1 Trillion has been projected for the infrastructure sector until 2017, 40% of which is to be
funded by the private sector” [ CITATION Mak17 \l 1033 ]. That is a massive investment.
Further, an ongoing investment in India’s infrastructure of “USD 650 Billion will be required for
urban infrastructure over the next 20 years” [ CITATION Mak17 \l 1033 ]. While the analysis
and projections of this report are confined to ten years, the opportunities are nearly limitless –
extending to at least 2037.
The initial expansion project was intended to organically establish sales offices in India,
and then create a similarly organic manufacturing and distribution supply chain. That
methodology remains viable, but likely will be surpassed in practicality by small organic sales
offices to catch the eye of a potential joint-venture associate within India. Infusing a quality
Indian manufacturer with both L.S. Starrett trade and manufacturing expertise, as well as cash
can bring about positive investment returns much more quickly and with significantly limited
(comparable) risk. [CITATION Placeholder1 \p 160 \l 1033 ]. A properly implemented and
managed joint venture will also dramatically reduce capital purchase costs. This is due in part to
the creation of an alliance versus a competition, and thereby a complement of funding (capital
investment) versus duplicate investments in separate (completing) companies with diluted sales
and net incomes. Augmented or differential work shifts will offset facility and manufacturing
capacity limits by leveraging what would otherwise be off-hours facility downtime. The same
concept holds true for the hiring requirements. The successful India-based company will already
have a strong personnel complement. The joint-venture staffing augmentation will be limited to
the number of personnel necessary to address only the unmet increased production and sales
demands, along with legal, financial, accounting, and other national and international law and
relationship management experts.
Refer to Appendix 12 – 10 year Projections for details and trending on the 2017 pro
forma financials and projections through 2027. This appendix shows that the annual and
cumulative cash benefits and outflows associated with the proposed business expansion into
India for the next 10 years are significantly profitable and more profitable. It also presents
finances with the option not to invest in this business expansion.
Financing
A total of $11 million dollars are needed to expand successfully into the Indian market.
The cost of financing the investment through a loan or loans is relatively inexpensive, with
estimates between 6.5% and 9% from the Small Business Administration. [ CITATION
SBA17 \l 1033 ]. This does not take into account the likely incentives for foreign investors from
the Indian National Government. With shares currently at $7.50 each, attempting to raise
$11MM through equity means that L.S. Starrett would have to issue more than 14,650,000
shares. As of June 31, 2016, L.S. Starrett has “Class A common stock $1 par (20,000,000 shares
authorized; 6,249,563 outstanding” [ CITATION Sta17 \l 1033 ]. There are not enough share
authorized to meet this requirement and there is not enough interest in the stock to gather that
level of funding even if there were enough stock authorized. Therefore, capitalization through
owner equity is not practical.
An infusion of $11MM with an annual gross loan payment of $1.15MM leaves L.S.
Starrett with a positive cash flow of from financing of $9.85MM at the end of year one. This also
creates a positive position of $1.3MM for Starrett at the end of year one, compared to no loan
and no Indian project whatsoever. Attempting to use Starrett cash on hand to fund a portion of
the Indian expansion project would be less advantageous than other options. Using Starrett cash
on hand as the sole source of funding for the Indian expansion project would be highly
unfavorable. Using the future value formula of FV = PV*(1+R)^n, the value of that $11MM in
cash, at 9% interest for 15 years is $40,067,307. The opportunities that would be lost by
committing all of that cash to one project are simply too significant and would put a strangle
hold on the future economic capacity of L.S. Starrett. The initial loan investment will cover the
resources required to get a presence on the ground in India while L.S. Starrett seeks to get a
reliable joint-venture manufacturing and sales agreement inked and operational. The largest
portion of the initial investment will go toward the cost of goods sold (India) followed by various
human capital and production augmentation expenses. The second year cash flow from financing
actually presents a small cumulative cash flow deficit (-$200,000) compared to no India business
expansion, due in part to ongoing loan payments and $450,000 in continued HR, legal, and
related unique business-expansion requirements. These expenses should level off at or near
$175,000 annual for legal and international relations costs in years four and outward. An
increasing annual and cumulative cash flow will present and sustain in year three with $3.35MM
and $3.15MM, respectively. This will carry onwards through year 2027, reaching annual and
cumulative cash flows of $48.9MM and $239MM, respectively. In ten years, the total cash
increase to L.S. Starrett from the India business expansion project alone will total roughly
14.35% more than then entire 2016 annual revenue.
Alternative Financing Options
Option 1: In the event that a loan for a smaller amount was determined to be the upper
limit of credit extended to L.S. Starrett for this India-based expansion, the company should
consider a renegotiation and consolidation of existing loans and this expansion loan into a
unified loan, with the potential for a participatory loan with multiple lending institutions. This
would reduce each institution’s exposure and would free up enough loan value to complete the
transaction. An added advantage to this option is the fact that L.S. Starrett’s current “credit
facility expires in April of 2018” [CITATION Sta17 \p 20 \l 1033 ].

Option 2: L.S. Starrett can “put more skin in the game” by contributing more upfront
cash from treasury and thereby reduce the loan amount sought. This would also likely reduce the
interest rate, thus saving even more money.
Option 3: If creditors decline the offer to reduce treasury with more upfront company
cash, the smaller loan should be accepted to secure L.S. Starrett’s positioning with the high
quality potential joint-venture companies in India.
Moving forward with a business combination mechanism, specifically a joint venture, is
ideal for expanding into the new market. L.S. Starrett has only a limited perspective of the India
culture and market, and need the “benefits from a local partner’s knowledge of the host country’s
competitive conditions, culture, language, political systems, and business” [CITATION
Placeholder1 \p 160 \l 1033 ]. L.S. Starrett has patents, as well as substantial and proven
technical, managerial, and international knowledge. Starrett also has established channels for
product reciprocity and export out of India. These are key markets and contributions with which
a growing Indian market and manufacturing company will seek to align. As noted previously, the
start-up and “development costs and/or risks of opening a foreign market are high” [CITATION
Placeholder1 \p 160 \l 1033 ]. Both L.S. Starrett and any prospective Indian tool manufacturing
company will know that there is much to be gained by distributing the costs and risks across the
board with one another. Additionally, both (or all) parties become invested in the mutual success
and will watch from within their respective boards to ensure that the “partners face a low risk of
being subject to nationalization or other forms of adverse government interference” [CITATION
Placeholder1 \p 160 \l 1033 ].
The distractor or disadvantage to the joint venture is that one or the other partner will
usually end up with less than 50% ownership and control. The other partner typically ends up
with control. That can change the course of the any number of outcomes, including quality,
liability, and even long-term company viability. Further, many long-range agreements must be
considered in advance of final commitment. An agreement will be necessary for collaboration
and unification of the main companies and their subsidiaries in an all-for-one, and one-for-all
mutual success campaign against competitive attacks from around the globe. Based on the
minimum ten-year forecast created for this business expansion, there needs to be an
understanding of how the organization will look in ten years, and which (if any or both) of the
companies may want or will have the option to buy out the other as a wholly owned subsidiary.
All of this has to be evaluated as viable and reasonable options for the L.S. Starrett.
Track Record
L.S. Starrett will prosper well from the proposed business expansion via joint venture in
India, with or without the business expansion, as L.S. Starrett is positioned to succeed with solid
financial standing and low risk for loan default. In 2016, “The Company’s cash and investments
increased $0.8 million to $19.8 million. Total debt decreased $1.5 million” [CITATION Sta17 \p
9 \l 1033 ]. Starrett managed to do that by reducing expenses by almost $12.5MM, even while
revenue dropped by 13.6% from 2015. The company has been pound down its costs of doing
business. At the close of 2016, L.S. Starrett carried only 41.78% of the long-term debt it held in
2012, dropping from $29.4MM to $17.1MM. Moreover, L.S. Starrett had not short-term debt
obligations or payments in 2016. [CITATION Sta17 \p 34 \l 1033 ]. Clearly, L.S. Starrett is on
solid financial footing, and thus at a low risk for default and high probability of continued
success.
L.S. Starrett is highly trustworthy with superior, legal, and ethical financial behavior. “As
of June 30, 2016, the Company has resolved all open income tax audits” [CITATION Sta17 \p
45 \l 1033 ]. That is a substantial and very positive statement. It does not mean that recent
periods are not subject to further audit, but that all known audit matters are resolved to the
satisfaction of parties. Further, note that “[t]he Company’s internal control over financial
reporting as of June 30, 2016 has been audited by Grant Thornton LLP, an independent
registered public accounting firm” [CITATION Sta17 \p 57 \l 1033 ] and found positive opinion.
L.S. Starrett has in place a full Code of Ethics, which is available to the public on the company
website. The code’s purpose is to “promote honest and ethical conduct, full and accurate
reporting, and compliance with laws as well as other matters” [CITATION Sta17 \p 59 \l 1033 ].
As published by both The Wall Street Journal [ CITATION Pas02 \l 1033 ] and by
Gutenberg [ CITATION WorND \l 1033 ], the ethics, legalities, and reputation of the L.S.
Starrett Company were called into question in a dramatic fashion in 2002. “[A] former Starrett
subcontractor alerted US Defense Department investigators to an alleged fraud issue with a
measuring device called Rapid Check” [ CITATION WorND \l 1033 ]. As the investigation
unfolded, Starrett’s President and CEO, Douglas Starrett affirmed the company’s Code of
Conduct, referenced above, which highlighted several aspect of expected employee conduct
including potential conflicts of interest and activities involving family and close associates that
may be incongruent with company interests, and (presumably) the public good. L.S. Starrett also
replaced all of the potentially defective Rapid Check devices free. “The federal investigation
yielded nothing damaging, and it was terminated in December 2003 with no charges filed”
[ CITATION WorND \l 1033 ].
Clearly, anyone can allege misconduct. To do so in a way and magnitude that warrants a
full-on federal investigation with a raid of company facilities and documents means that there
was an obvious and serious potential for conspiratory and felonious activity. Very few
organizations can navigate a federal investigation with a zero-find fault result. L.S. Starrett
maintains a stellar reputation and product line and is fully worthy of all consideration.
Questions and Answers
Question 1: Will L.S. Starrett be creating a legal partnership (corporation, etc.) and will this
result in shared liabilities and tax consequences?
Answer 1: Yes. This will be a legal entity, most likely in the form of a limited liability company
(LLC) to reduce Starrett’s potential liability. The Indian partner will provide sales personnel and
facilities initially, then production personnel. Each entity will own a 50% vestment. Taxes will
be the obligation of the two parent companies in accordance with the two counties’ laws.
Question 2: What will each side of the joint venture provide?
Answer 2: L.S. Starrett will provide the funding, intellectual property (copyrights, patents, and
trademarks), and brand name licensing. The partner will provide the marketing channels and
related assets (mailing/customer lists, offices, and sales and distribution personnel) and as the
products gain traction the partner (through SGB) will operate the supply chain, production staff,
and manufacturing facilities.
Question 3: What is each side not allowed to do?
Answer 3: Primarily neither side is allowed to compete with directly-matched product offerings
during the first year of sales. During and immediately after the first year evaluations of potentials
sales from each partner’s competing products will determine which products will succeed from
which partner. Secondly, no supply, composition, manufacturing, or other trade secrets can be
disclosed. Starrett may not market in any form in India. The partner may not establish new
markets in Starrett’s existing markets, as well.
Question 4: Who is liable for debts, losses, and damages and will insurance cover everything?
Answer 4: L.S. Starrett will cover product liability during sale of the imported tools. The joint
venture will cover product liability in post Starrett-licensed India manufacture. The joint venture
agreement will also specify that all financial losses are the obligation of L.S. Starrett until
manufacturing takes place in India. Then debt is paid directly by the joint venture to creditors.
Question 5: 1. How are profits split?
Answer 5: During pre-manufacturing phase, the partner (not the joint venture) will pay Starrett
monthly for COGS. Simultaneously, the partner will receive 55% of the profits and Starrett will
receive 45% of profit. Settlement will be made prior to the tenth of each month through Citibank.
Citibank will receive the funds in rupees and post it to the L.S. Starrett Citibank home account in
U.S. dollars. Starrett has already negotiated lower transfer and transaction fees to be apply.
Question 6: Who are the decision makers and executive contacts from both Starrett, the partner,
and the joint venture company?
Answer 6: The Board of Directors of each parent company will approve their executive contact
list, which is expected to consist of at least the CEO, COO, CFO, and CIO. After the joint
venture is established the board of directors of each company will approve their executive and
operational appointments to the joint venture. A mutually agreed-upon CEO, COO, CFO, and
CIO will be installed at the joint venture. Their monthly and quarterly reports will keep everyone
well informed, and the contact information will be made available when it is formalized. The
CEO, COO, CFO, and CIO of both parent companies, and CEO, COO, CFO, and CIO of the
joint venture will serve as the Executive Team.
Question 7: What is the timeframe of this project, and what are the milestones and deadlines?
Answer 7: The entire project will be at least a ten-year investment. Milestones include product
training (completed by signing date plus two months), first import delivery (complete training
date, plus two months), first sales drive (inventory receipt date, plus one month) and the first
payments and profit distribution (first sales drive date, plus one month). There will be quarterly
and annual reviews of how the personnel and management integration are working, the profits of
the joint venture, and the potential for the new manufacturing plant. In these reviews, reviews of
fail-out parameters, exit contingencies, and readiness will be discussed, mandatorily. Meeting
minutes from each meeting will be provided to the executive team.
Question 8: What happens if one party wants out early, or one side does not do their share?
Answer 8: Performance parameters are placed on each person as they sign the contract and code
of ethics, to be a part of the joint venture. Starrett will have personnel tightly integrated in the
joint venture. If performance becomes an issue, the joint venture agreement and the 50/50
relationship allow either side to invoke the exit clause of the joint venture contract, requirements
and penalties allowed. If either side pulls out for cause, the Indian partner cannot use Starrett
technology or other information and all licensing agreements are void. If the Indian partner pulls
out, L.S. Starrett will wholly own the new distribution and manufacturing plants.
Question 9: What are the benefits to each side?
Answer 9: L.S. Starrett takes the risk but gets only 45% of the profits immediately. The benefit
to the Indian partner is that there is no additional risk other than each month’s inventory
purchase. The risk really begins with the Indian manufacturing which is nearly entirely L.S.
Starrett’s financial concern. Starrett get a significant revenue increase.
Question 10: Who owns what is created via this joint venture, such as inventory, mailing lists,
and intellectual property?

Answer 10: L.S. Starrett will always own its name and licensing rights. Initially the partner will
hold use-rights to the L.S. Starrett product name(s). Once joint venture manufacturing is up and
running, the joint venture will take over the rights.
Question 11: Does either side need a Non-Disclosure Agreement (NDA)?
Answer 11: L.S. Starrett will be sharing business plans, trade secrets, and intellectual property
with the partner and the joint venture. So a code of ethics are required for all Indian employees.
There will also be partner and venture contracts with child and other ethical labor law terms, and
non-compete clauses for owning, creating, or selling an L.S. Starrett tool in a county that had or
has company-based distribution of any portion of the L.S. Starrett product.
Question 12: Why is expansion be a better idea than attempting to make more money by
improving and streamlining Starrett’s current operations?
Answer 12: L.S. Starrett has been good and consistent with bringing costs down. Revenue,
however, is not climbing. Expanding revenue sources is the next logical step and India will
ultimately provide the lowest cost of revenue.
Question 13: How can Citibank be sure that L.S. Starrett will not default on this loan?
Answer 13: L.S. Starrett has little debt. Short term debt is less than 1% of total liabilities and
equity in 2016 [ CITATION Sta17 \l 1033 ]. Starrett’s current ratio is also very good at 5.65 in
2015 and 5.71 in 2016 [ CITATION Sta17 \l 1033 ]. This indicates that Starrett is in good
position to pay back this loan.

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Appendix 1 – The Most Likely Scenario
L.S. Starrett - Pro Forma Financial Model (in thousands of dollars U.S.)
2012 2013 2014 2015 2016 2017 (Pro forma) 2018 (Pro forma) 2019 (Pro forma)
Traditional Revenue w/Trending $ 260,148 $ 243,979 $ 247,134 $ 241,550 $ 208,685 $ 261,370 $ 251,336 $ 248,111
Traditional Revenue $ 260,148 $ 243,979 $ 247,134 $ 241,550 $ 208,685 $ 248,000 $ 249,000 $ 251,000
Revenue Add: India Venture $ - $ - $ - $ - $ - $ 3,000 $ 8,500 $ 13,000
Total Revenue $ 260,148 $ 243,797 $ 247,134 $ 241,550 $ 208,685 $ 251,000 $ 257,500 $ 264,000
COGS $ 182,073 $ 171,985 $ 166,038 $ 164,855 $ 162,697 $ 173,500 $ 171,000 $ 168,000
S.A.&G. $ 79,925 $ 73,090 $ 69,181 $ 68,092 $ 63,319 $ 64,500 $ 62,500 $ 62,500
Non-Recurring $ - $ - $ - $ (1,339) $ 4,114 $ 3,500 $ 3,000 $ 3,000
Capital Investment: India $ - $ - $ - $ - $ - $ 11,000 $ 3,500 $ 2,000
Legal and HR: India $ - $ - $ - $ - $ - $ 550 $ 450 $ 250
Other Income (Expense) $ (1,961) $ (2,074) $ (142) $ - $ (70) $ (500) $ 90 $ -
Income Tax $ (777) $ 958 $ 5,345 $ 4,698 $ (6,245) $ (7,000) $ 2,000 $ 2,500
Total Expenses w/Trending $ 259,260 $ 243,959 $ 240,422 $ 236,306 $ 223,815 $ 256,461 $ 248,981 $ 246,576
Total Expenses $ 259,260 $ 243,959 $ 240,422 $ 236,306 $ 223,815 $ 245,550 $ 242,540 $ 238,250
Profit w/Trending $ 888 $ (162) $ 6,712 $ 5,244 $ (15,130) $ 4,836 $ 2,300 $ 1,485
Profit $ 888 $ (162) $ 6,712 $ 5,244 $ (15,130) $ 5,450 $ 14,960 $ 25,750
Profit Margin 0.34% -0.07% 2.72% 2.17% -7.25% 2.17% 5.81% 9.75%
Working Capital $ 111,000 $ 110,000 $ 111,000 $ 110,000 $ 99,100 $ 112,980 $ 110,713 $ 109,985
Analyst's notes:
Item 1 2012-2015 revenue has been within a 7.15% variance of its highest point. 2016 was exceptional at 19.39% from high, in large part (60%) due
to foreign exchange losses. 2008 EURO was ~1.55. 2016-06-30 EURO was 1.09 USD. 2017-06-28 Euro was 1.141 with improving trend.
Item 2 2016 contained $17.1M expense to pension for a mark-to-market stated loss (not actual cash) due to low interest and bond yields
Item 3 2017 will contain expenses for temporarily expanded manufacturing outside of India, and costs to import for sales and distribution creation
(and later manufacturing expansion) into India
Item 4 2017 will see recovery of both domestic and international sales due to stabilization / normalization of international concerns which are
protracting versus original abrupt on-take such as Brexit and exchange rates.
Item 5 2018 will see revenue increases and (start-up) expense decreases as capital build in India begins to bear fruit in 2018.
Item 6 2019 nears decade high revenue as costs continue to reduce with production increases. Staffing costs increase and stabilize in 2019 to
support new production and sales in India, as well.
Item 7 This color and pattern scheme indicates a calculated future trend base solely on history data. Data is not a part of actual calucations
elsewhere. Presented for comparison purposes only.
Appendix 2 – The Worst Case Scenario
2015 2016 2017 (Pro forma) 2018 (Pro forma) 2019 (Pro forma)
Traditional Revenue $241,550 $208,685 $ 248,000 $ 249,000 $ 251,000
New Revenue: India Venture $ - $ - $ - $ 3,000 $ 4,500
Total Revenue $241,550 $209,685 $ 248,000 $ 252,000 $ 255,500
COGS $164,855 $162,697 $ 177,000 $ 174,000 $ 170,000
S.A.&G. $ 68,092 $ 63,319 $ 64,500 $ 62,500 $ 62,500
Non-Recurring $ (1,339) $ 4,114 $ 3,500 $ 3,000 $ 3,000
Capital Investment: India $ 14,000 $ 7,000 $ 5,500
Legal and HR: India $ - $ - $ 650 $ 550 $ 300
Other Income (Expense) $ - $ (70) $ (750) $ (200) $ (15)
Income Tax $ 4,698 $ (6,245) $ (7,000) $ 2,000 $ 2,500
Total Expenses $236,306 $223,815 $ 251,900 $ 248,850 $ 243,785
Profit $ 5,244 $ (14,130) $ (3,900) $ 3,150 $ 11,715
Profit Margin 2.17% -6.74% -1.57% 1.25% 4.59%
Analyst's notes:
Item 1 2012-2015 revenue has been within a 7.15% variance of its highest point. 2016 was exceptional
at 19.39% from high, in large part (60%) due to foreign exchange losses. 2008 EURO was
~1.55. 2016-06-30 EURO was 1.09 USD. 2017-06-28 Euro was 1.141 with improving trend.
Item 2 2016 contained $17.1M expense to pension for a mark-to-market stated loss (not actual cash)
due to low interest and bond yields
Item 3 2017 will contain expenses for temporarily expanded manufacturing outside of India, and
costs to import for sales and distribution creation (and later manufacturing expansion) into
India
Item 4 2017 will see recovery of both domestic and international sales due to stabilization /
normalization of international concerns which are protracting versus original abrupt on-take
Item 5 2018 will see revenue increases and (start-up) expense decreases as capital build in India
begins to bear fruit in 2018.
Item 6 2019 nears decade high revenue as costs continue to reduce with production increases.
Appendix 3 – The Best Case Scenario
2015 2016 2017 (Pro forma) 2018 (Pro forma) 2019 (Pro forma)
Traditional Revenue $241,550 $208,685 $ 248,000 $ 249,000 $ 251,000
New Revenue: India Venture $ - $ - $ 4,500 $ 12,500 $ 19,000
Total Revenue $241,550 $209,685 $ 252,500 $ 261,500 $ 270,000
COGS $164,855 $162,697 $ 172,500 $ 170,000 $ 168,000
S.A.&G. $ 68,092 $ 63,319 $ 64,500 $ 62,500 $ 62,500
Non-Recurring $ (1,339) $ 4,114 $ 3,500 $ 3,000 $ 3,000
Capital Investment: India $ 10,500 $ 3,000 $ 1,100
Legal and HR: India $ - $ - $ 325 $ 220 $ 220
Other Income (Expense) $ - $ (70) $ (350) $ 100 $ 50
Income Tax $ 4,698 $ (6,245) $ (7,000) $ 2,000 $ 2,500
Total Expenses $236,306 $223,815 $ 243,975 $ 240,820 $ 237,370
Profit $ 5,244 $ (14,130) $ 8,525 $ 20,680 $ 32,630
Profit Margin 2.17% -6.74% 3.38% 7.91% 12.09%
Analyst's notes:
Item 1 2012-2015 revenue has been within a 7.15% variance of its highest point. 2016 was exceptional
at 19.39% from high, in large part (60%) due to foreign exchange losses. 2008 EURO was
~1.55. 2016-06-30 EURO was 1.09 USD. 2017-06-28 Euro was 1.141 with improving trend.
Item 2 2016 contained $17.1M expense to pension for a mark-to-market stated loss (not actual cash)
due to low interest and bond yields
Item 3 2017 will contain expenses for temporarily expanded manufacturing outside of India, and
costs to import for sales and distribution creation (and later manufacturing expansion) into
India
Item 4 2017 will see recovery of both domestic and international sales due to stabilization /
normalization of international concerns which are protracting versus original abrupt on-take
such as Brexit and exchange rates.
Item 5 2018 will see revenue increases and (start-up) expense decreases as capital build in India
begins to bear fruit in 2018.
Item 6 2019 nears decade high revenue as costs continue to reduce with production increases.
Appendix 4 – Loan Expectations
Loan Sequence Most Favorable Scenario Alternative Scenario

Initial Loan Intended payment Committed Payment Intended payment Committed Payment
Loan amount $ 11,000,000.00 $ 11,000,000.00 $ 11,000,000.00 $ 11,000,000.00
Interest Rate 6.50% 6.50% 9.00% 9.00%
Number of years 15 20 15 20
Monthly payment $ 95,821.81 $ 82,013.04 $ 111,569.32 $ 98,969.86

Annual payments $ 1,149,861.72 $ 984,156.54 $ 1,338,831.89 $ 1,187,638.26
Total payments $ 17,247,925.83 $ 19,683,130.78 $ 20,082,478.37 $ 23,752,765.23
Total Interest $ 6,247,925.83 $ 8,683,130.78 $ 9,082,478.37 $ 12,752,765.23
Supplemental Loan Intended payment Committed Payment Intended payment Committed Payment
Loan amount $ 5,500,000.00 $ 5,500,000.00 $ 5,500,000.00 $ 5,500,000.00
Interest Rate 6.50% 6.50% 9.00% 9.00%
Number of years 15 20 15 20
Monthly payment $ 47,910.91 $ 41,006.52 $ 55,784.66 $ 49,484.93

Annual payments $ 574,930.86 $ 492,078.27 $ 669,415.95 $ 593,819.13
Total payments $ 8,623,962.92 $ 9,841,565.39 $ 10,041,239.18 $ 11,876,382.62
Total Interest $ 3,123,962.92 $ 4,341,565.39 $ 4,541,239.18 $ 6,376,382.62
Combined Monthly payment $ 143,732.72 $ 123,019.57 $ 167,353.99 $ 148,454.78

Appendix 5 – Population Growth Rates
Population Growth Percentages

1962-2016
3 2016 Population and Growth
2.5
2 United States
1.5
1
India
0.5
0
62 65 68 71 74 77 80 83 86 89 92 95 98 01 04 07 10 13 16
19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 China
China Linear (China) 0 00 00 00 00 00 00

India Linear (India) 0,0 0,0 0,0 0,0 0,0 0,0
00 , 00 , 00 , 00 , 00 , 00
United States Linear (United States) 5, 10 15 20 25 30
2016 Population (in 100's) 2016 Growth (in 1's)
Note: The multipliers on the bar graph are purposely inconsistent. The 2016 Population (blue) is divided by 100 for
presentation. The 2016 Growth population (orange) is actual, based on 2016 real population multiplied by the 2016 growth rate.
[ CITATION CIA17 \l 1033 ]

Appendix 6 – Stock Charts
Left: L.S. Starrett three month stock price chart, indicating Right: L.S. Starrett three year stock price chart,
a high of $10.10 in 2017-Q3 and closing at $9.10 on July 13, indicating a high of $21.95 in 2015-Q1. [ CITATION Sch17 \l
2017. [ CITATION Sch17 \l 1033 ] 1033 ]
Appendix 7 – Sales up 20%
Total Revenue $ 260,148 $ 243,797 $ 247,134 $ 241,550 $ 208,685 $ 251,600 $ 259,200 $ 266,600
COGS $ 182,073 $ 171,985 $ 166,038 $ 164,855 $ 162,697 $ 173,500 $ 171,000 $ 168,000
S.A.&G. $ 79,925 $ 73,090 $ 69,181 $ 68,092 $ 63,319 $ 64,500 $ 62,500 $ 62,500
Non-Recurring $ - $ - $ - $ (1,339) $ 4,114 $ 3,500 $ 3,000 $ 3,000
Income Tax $ (777) $ 958 $ 5,345 $ 4,698 $ (6,245) $ (7,000) $ 2,000 $ 2,500
Total Expenses $ 259,260 $ 243,959 $ 240,422 $ 236,306 $ 223,815 $ 245,550 $ 242,540 $ 238,250
Profit $ 888 $ (162) $ 6,712 $ 5,244 $ (15,130) $ 6,050 $ 16,660 $ 28,350
Profit Margin 0.34% -0.07% 2.72% 2.17% -7.25% 2.40% 6.43% 10.63%
Working Capital $ 111,000 $ 110,000 $ 111,000 $ 110,000 $ 99,100 $ 112,980 $ 110,713 $ 109,985
Analyst's notes:
Appendix 8 – Sales Down 20%
Total Revenue $ 260,148 $ 243,797 $ 247,134 $ 241,550 $ 208,685 $ 250,400 $ 255,800 $ 261,400
COGS $ 182,073 $ 171,985 $ 166,038 $ 164,855 $ 162,697 $ 173,500 $ 171,000 $ 168,000
S.A.&G. $ 79,925 $ 73,090 $ 69,181 $ 68,092 $ 63,319 $ 64,500 $ 62,500 $ 62,500
Non-Recurring $ - $ - $ - $ (1,339) $ 4,114 $ 3,500 $ 3,000 $ 3,000
Income Tax $ (777) $ 958 $ 5,345 $ 4,698 $ (6,245) $ (7,000) $ 2,000 $ 2,500
Total Expenses $ 259,260 $ 243,959 $ 240,422 $ 236,306 $ 223,815 $ 245,550 $ 242,540 $ 238,250
Profit $ 888 $ (162) $ 6,712 $ 5,244 $ (15,130) $ 4,850 $ 13,260 $ 23,150
Profit Margin 0.34% -0.07% 2.72% 2.17% -7.25% 1.94% 5.18% 8.86%
Working Capital $ 111,000 $ 110,000 $ 111,000 $ 110,000 $ 99,100 $ 112,980 $ 110,713 $ 109,985
Analyst's notes:
Appendix 9 – Net Present Values
Net Present Values Most Likely Scenario Sales Down 20% Scenario Sale Up 20% Scenario
Yearly Aggregated Yearly Aggregated Yearly Aggregated
Discount Rate 9% 9% 9%
Initial Investment $ 11,550 $ 11,550 $ 11,550
NPV Year 0 - 2017 $ (6,550) $ (6,550) $ (7,100) $ (7,100) $ (6,000) $ (6,000)
NPV Year 0 - 2018 $ 1,042 $ (5,508) $ (389) $ (7,490) $ 2,472 $ (3,527)
NPV Year 0 - 2019 $ 8,334 $ 2,825 $ 6,326 $ (1,164) $ 10,341 $ 6,814
$ 8,286 $ 7,122
Appendix 10 – Internal Rates of Return
Internal Rates of Return Most Likely Scenario Sales Down 20% Scenario Sale Up 20% Scenario
Yearly Aggregated Yearly Aggregated Yearly Aggregated
-47.62%
Initial Investment $ 11,550 Discount Rate $ 11,550 $ 11,550
NPV Year 0 - 2017 $ 0 -52.8140% $ 0 $ 0 -58.0100% $ 0 $ 0 -47.6200% $ 0
NPV Year 0 - 2018 $ 0 13.8080% $ 0 $ (0) 7.1480% $ 0 $ 0 20.1000% $ 0
NPV Year 0 - 2019 $ (0) 30.6370% $ 0 $ (0) 26.0835% $ 0 $ (0) 34.8940% $ 0
Appendix 11 – Shares History with Trending
[ CITATION NAS17 \l 1033 ]
Note: The above graphs created using data retrieved from the NASDAQ website. The graphs are original to this author.
Appendix 12 – 10 year Projections

Table 1: U.S. with India Project
L.S. Starrett - Financial Forecasting Model With India Project (in thousands of dollars U.S.)
2017 (Pro forma) 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027
Traditional Revenue $ 248,000 $ 249,000 $ 251,000 $ 255,000 $ 256,500 $ 258,800 $ 261,100 $ 263,400 $ 265,700 $ 268,000 $ 270,300
Revenue Add: India Venture $ 3,000 $ 8,500 $ 13,000 $ 21,000 $ 24,300 $ 30,490 $ 36,000 $ 41,510 $ 47,020 $ 52,530 $ 58,040
Total Revenue $ 251,000 $ 257,500 $ 264,000 $ 276,000 $ 280,800 $ 289,290 $ 297,100 $ 304,910 $ 312,720 $ 320,530 $ 328,340
COGS $ 173,500 $ 171,000 $ 168,000 $ 165,000 $ 164,900 $ 166,000 $ 169,500 $ 164,686 $ 163,789 $ 162,893 $ 161,996
S.A.&G. $ 64,500 $ 62,500 $ 62,500 $ 62,500 $ 62,500 $ 62,500 $ 62,500 $ 62,500 $ 62,500 $ 62,500 $ 62,500
Non-Recurring $ 3,500 $ 3,000 $ 3,000 $ 1,000 $ - $ - $ - $ - $ - $ - $ -
Capital Investment: India $ 11,000 $ 3,500 $ 2,000 $ 500 $ - $ - $ - $ - $ - $ - $ -
Legal and HR: India $ 550 $ 450 $ 250 $ 175 $ 175 $ 175 $ 175 $ 175 $ 175 $ 175 $ 175
Other Income (Expense) $ (500) $ 90 $ - $ 15 $ 20 $ 20 $ 20 $ 20 $ 20 $ 20 $ 20
Income Tax $ (7,000) $ 2,000 $ 8,475.00 $ 14,043.00 $ 15,961.50 $ 18,178.50 $ 19,471.50 $ 23,258.79 $ 25,870.71 $ 28,482.64 $ 31,094.57
Total Expenses $ 245,550 $ 242,540 $ 244,225 $ 243,233 $ 243,557 $ 246,874 $ 251,667 $ 250,640 $ 252,355 $ 254,071 $ 255,786
Profit $ 5,450 $ 14,960 $ 19,775 $ 32,767 $ 37,244 $ 42,417 $ 45,434 $ 54,271 $ 60,365 $ 66,460 $ 72,554
Profit Margin 2.17% 5.81% 7.49% 11.87% 13.26% 14.66% 15.29% 17.80% 19.30% 20.73% 22.10%
Cash Flow from Financing $ 9,850.00 $ 2,350.00 $ 850.00 $ (650.00) $ (1,150.00) $ (1,150.00) $ (1,150.00) $ (1,150.00) $ (1,150.00) $ (1,150.00) $ (1,150.00)
Cash Flow from Investors $ (50.00) $ 125.00 $ 200.00 $ 225.00 $ 300.00 $ 300.00 $ 350.00 $ 387.50 $ 425.00 $ 462.50 $ 500.00
Cash Flow from Operations $ (1,550.00) $ 16,960.00 $ 28,250.00 $ 46,810.00 $ 53,205.00 $ 60,595.00 $ 64,905.00 $ 77,529.29 $ 86,235.71 $ 94,942.14 $ 103,648.57
Total Cash Flow $ 8,250.00 $ 19,435.00 $ 29,300.00 $ 46,385.00 $ 52,355.00 $ 59,745.00 $ 64,105.00 $ 76,766.79 $ 85,510.71 $ 94,254.64 $ 102,998.57
Working Capital $ 112,980 $ 110,713 $ 109,985 $ 108,181 $ 108,516 $ 105,963 $ 106,942 $ 110,568 $ 109,632 $ 107,273 $ 107,713
Table 2: U.S. without India Project

L.S. Starrett - Financial Forecasting Model Without India Project (in thousands of dollars U.S.)
2017 (Pro forma) 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027
Traditional Revenue $ 248,000 $ 249,000 $ 251,000 $ 255,000 $ 256,500 $ 258,800 $ 261,100 $ 263,400 $ 265,700 $ 268,000 $ 270,300
COGS $ 173,500 $ 162,450 $ 159,600 $ 156,750 $ 156,655 $ 157,700 $ 161,025 $ 156,451 $ 155,600 $ 154,748 $ 153,897
S.A.&G. $ 64,500 $ 62,500 $ 62,500 $ 62,500 $ 62,500 $ 62,500 $ 62,500 $ 62,500 $ 62,500 $ 62,500 $ 62,500
Non-Recurring $ 3,500 $ 3,000 $ 3,000 $ 1,000 $ - $ - $ - $ - $ - $ - $ -
Other Income (Expense) $ (500) $ 90 $ - $ 15 $ 20 $ 20 $ 20 $ 20 $ 20 $ 20 $ 20
Income Tax $ (7,000) $ 2,000 $ 7,770.00 $ 10,420.50 $ 11,197.50 $ 11,574.00 $ 11,266.50 $ 13,328.57 $ 14,274.05 $ 15,219.54 $ 16,165.02
Total Expenses $ 234,000 $ 230,040 $ 232,870 $ 230,686 $ 230,373 $ 231,794 $ 234,812 $ 232,300 $ 232,394 $ 232,488 $ 232,582
Profit $ 14,000 $ 18,960 $ 18,130 $ 24,315 $ 26,128 $ 27,006 $ 26,289 $ 31,100 $ 33,306 $ 35,512 $ 37,718
Profit Margin 5.65% 7.61% 7.22% 9.54% 10.19% 10.44% 10.07% 11.81% 12.54% 13.25% 13.95%
Cash Flow from Financing $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ -
Cash Flow from Investors $ (50.00) $ (25.00) $ 50.00 $ 75.00 $ 125.00 $ 125.00 $ 158.33 $ 183.33 $ 208.33 $ 233.33 $ 258.33
Cash Flow from Operations $ 7,000.00 $ 20,960.00 $ 25,900.00 $ 34,735.00 $ 37,325.00 $ 38,580.00 $ 37,555.00 $ 44,428.57 $ 47,580.18 $ 50,731.79 $ 53,883.39
Total Cash Flow $ 6,950.00 $ 20,935.00 $ 25,950.00 $ 34,810.00 $ 37,450.00 $ 38,705.00 $ 37,713.33 $ 44,611.90 $ 47,788.51 $ 50,965.12 $ 54,141.73
Working Capital $ 112,980 $ 110,713 $ 109,985 $ 108,181 $ 108,516 $ 105,963 $ 106,942 $ 110,568 $ 109,632 $ 107,273 $ 107,713
Benefit from India Business Expansion

Per Year $ 1,300 $ (1,500) $ 3,350 $ 11,575 $ 14,905 $ 21,040 $ 26,392 $ 32,155 $ 37,722 $ 43,290 $ 48,857
Cummulative $ 1,300 $ (200) $ 3,150 $ 14,725 $ 29,630 $ 50,670 $ 77,062 $ 109,217 $ 146,939 $ 190,228 $ 239,085

MBA-640 - Week 09 - Final Project

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MBA-640 - Week 09 - Final Project

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Running Head: EXTERNAL CAPITAL FUNDING PROPOSAL 1

Southern New Hampshire University

significantly underserved population, and a greater than 10% unemployment. Relationship

insightful organizations. L.S. Starrett is positioned to serve and capitalize by engaging

manufacturing and warehousing facilities in other countries to ramp up production of India’s

supplemented by secondary inventories from progressively distant facilities in Singapore, Japan,

Europe, and Mexico.

made to commit to SGB manufacturing in India.

manufacturing build (at a minimum) will take place.

financial commitment of 20 years while anticipating savings of $3,652,807.42 by leveraging the

revenues in the subsidiary reports.

or extended marketing campaigns in India.

service, to practical housing and “robust IT connectivity and digitalization” [ CITATION

regeneration and rebirth of India’s cities.

global manufacturing industrial base with concentration in the metalworking, construction,

expanding its manufacturing operations in China” [ CITATION Sta17 \l 1033 ].

micropower-enabled facilities complimentary to the India’s massive Smart Cities investment.

2016” [ CITATION Sta17 \l 1033 ]. Continued globalization is mandatory to the company’s

population growth and economic development incentives – to be certain that targeted

discovered and mitigated. [ CITATION USF98 \l 1033 ] [ CITATION Raj17 \l 1033 ].

improper alignment, intentions misunderstood by local government officials, labor law

be mitigated significantly by advanced engagement. This risk was originally expected to be

mitigated by membership and participation in the India Machine Tool Manufacturers

regional consequences, unemployment / underemployment, extreme weather events, failure of

[ CITATION Wor16 \l 1033 ] – could be reinterpreted by anyone. Clearly, several of these

would be out of Starrett’s span of control.

also a big pull for expanding companies” [ CITATION TMF16 \l 1033 ].

should seek to expand.

Microeconomic risks and resulting decision-making rely on a series of inputs including

next decision set.

looking for careers.

Alternate Financial: Sales Fall (20% short of or are 20% higher)

per share, and an expected increase in the price per share.

Alternate Financial: Time Value of Money

interest in remaining with this venture.

offers the best opportunities.

disadvantages, especially as it relates to “demand preemption, scale economies, and switching

extending to at least 2037.

(comparable) risk. [CITATION Placeholder1 \p 160 \l 1033 ]. A properly implemented and

relationship management experts.

finances with the option not to invest in this business expansion.

owner equity is not practical.

14.35% more than then entire 2016 annual revenue.

Alternative Financing Options

facility expires in April of 2018” [CITATION Sta17 \p 20 \l 1033 ].

interest rate, thus saving even more money.

quality potential joint-venture companies in India.

Moving forward with a business combination mechanism, specifically a joint venture, is

competitive conditions, culture, language, political systems, and business” [CITATION

being subject to nationalization or other forms of adverse government interference” [CITATION

Placeholder1 \p 160 \l 1033 ].

considered in advance of final commitment. An agreement will be necessary for collaboration

obligations or payments in 2016. [CITATION Sta17 \p 34 \l 1033 ]. Clearly, L.S. Starrett is on

subcontractor alerted US Defense Department investigators to an alleged fraud issue with a

[ CITATION WorND \l 1033 ].

Questions and Answers

result in shared liabilities and tax consequences?

Question 2: What will each side of the joint venture provide?

and manufacturing facilities.

Question 3: What is each side not allowed to do?

markets in Starrett’s existing markets, as well.

Question 5: 1. How are profits split?

and the joint venture company?

joint venture will serve as the Executive Team.