Aspen Tech case study Essay

explanation and everyplaceview Specialized in the development of semblance soft knock off for node in extremity manufacturing industries Advanced System for affect Engineering (ASPEN) project conducted at the mummy Intitutes of Technology (MIT) in Cambridge Massach holdtts, from 1976 to 1981 Founded in 1981 by Dr. Larry Evans, a professor of chemical engineering at MIT Larry Evansleadership in the development and screening of integ castd systems for role model, simulation and optimization of industrial chemical process tale and Overview In 1982 its first grade of operations, AspenTech lost USD565,000 on gross sales of USD182,000 Over next 13 long time AspenTechs sales grew rapidly as it became a major payer in the process simulation comp onenessnt of the softw atomic number 18 manufacturing. 1995 company earned net income $5.4 gazillion on sales $57.5 million. AspenTech estimated that it commanded 50% of thesimulation market for chemical sector. 1995, it employed 417 people of which 265 ware based in the US and the remainder in office in 5 countries.History and Overview AspenTech went public in USDD31 million IPO which include a USD 18 million primary offering and USD 13 Million secondary offering to finance further R&D to meet externally developed technologies to allow early investors to monetize their holdings in the company, Feb1995, Aspentech conducted a $23 million public offering, which included a USD 1 million primary offering and USD 22 million secondary offering. 1995, AspenTech was the only one of the firms that specialized in simulation programs for chemical petroleum, and petrochemicals industries that was publicly traded.Products (versi makalah)Aspen confirmingAspen Plus is the most popular producta steady state mold system built around the core technology This product accounted 48% of sales in 1995Speed UPIt was AspenTechs dynamic process modeling productcommercialized in 1986 by Prosys Tecknology that AspenTech purchased in 1 991 gookIt is a less powerful version of Aspen PlusAdventA software to optimize the tradeoff between capital expenditures for energy relieve heat shiftrs and the energy saving realizedProduct Portfolio (versi makalah) Properties PLUSIt is a database of chemicals properties underlying its former(a) products, popular with customers developed in-house modeling software new(prenominal) modules offers to the customers license separately use with its other products to model subsystems used in highly specialized chemicals processing application.Product Portfolio (versi web) impact EngineeringProcess simulation Chemicals (10 products AspenPlus)Process simulation Oil&Gas (8 products AspenHYSYS)Process simulation Refining (11 products Aspenadsim+)Process simulation Batch/Pharma (8 products Aspenproperties) Model Deployment (3 products AspenModelrunner)Equipment modeling (8 products AspenAcol+)Basic Engineering (2 products AspenKbase)Economic Evaluation (3 products Aspn Icarus Projec t Manager)Advance Process Control (14 products Aspen Apollo, Aspen IQ)Planning & Scheduling (10 products Aspen Advisor, Aspen MBO)Supply & Distribution (3 products Aspen Retail)Production focussing & Execution (16 products Aspen 0server)Sales & Marketing1995, licensed to more than 450 companies chemical industry and 350 univeritiesThe selling cycle for process modelling software was long (6-12 months)AspenTech charged a premium over competitors products, raise licensing fees three times (1998-1995)10%Customer loyalty Over 90% renewed their software 1994 34% revenue from software renewal 34% from expansion from existing customerUnited States Directs sales force Earned combination of salary & relegationSales subsidiaries UK, Japan, HongKong, Brussels Serve topical anesthetic & regional markets via directs sales forces pass software for a non-cancelable shape 3 or 5 yearsCharge annual fee x license name (year) by-line rate 9.5% 11% currently 12%Customer were more in all likelihood to buy software priced in local property try flick1. foreign reciprocation Risksell software in local currenciesinstallment from three-to-five years creates foreign exchange photograph exchange rate fluctuations52% revenue generated from foreign company with following revenues figures Europe 31%Asia 12%Other countries 9%In United State 48%.Risk exposure are might be applicable performance mental picture (High)most the costumer operated outside of USTranslation vulnerability (Low)convert foreign property fiscal statements into a single capital (USD).Risk Exposure2. Interest Rate Risk (low) AspenTech debt using US dollar currency fix interest rate and mid term (3years) place a seasonal line-of-credit ease with a New England brimRisk Exposure3. confidence RiskCredit venture (default essay) in high exposure level2 sources probability trigger this happengrowing rapidlycustomer choose to defer wages of their license over the life of the contractEx AspenTech was liable for $ 4,6 million of this measuring stick under limited recourse agreementUnwilling (Low)most of the customers are a loyal customerUnable (High)depend on the vitrine of business of customerLiquidity Riskmany of its customers chose to defer payment of their licenses over the life of the contractthe company usually experienced an in operation(p) cash shortfallEx the firm booked revenue of USD57.5 million, yet receive cash payments directly from customers of only $38.5 million (66.96%).Management Risk Perform by AspenTechForeign Exchange Riskeliminated all sales dealing exposure arising from foreign currency denominated license contract inline with its put on the line fakement policy by doing hedging Sale non USD installment receivable for USD forward currency agreementCredit Risk AspenTech has not managed the risk of the uncollectible installment The contract with GE and Sanwa in selling the account receivable has limited recourse agreementLiquidity Risk To manage its liquidity risk in order to cover their twenty-four hour period to day operation, AspenTechsell its receivable to GE and Sanwa and other financial institution. AspenTech also has debt to Massachusetts Capital Resources placed a seasonal line of credit facility with New England bank.RecommendationAspenTechs should reexamine the firm risk charge policies and practices in light of the changes over the past year AspenTechs world(prenominal) sales had remained a substantial portion of its revenues the firm international expenses had subjoin a slightly faster rate than its international revenue AspenTech had foregone from private company into a publicly traded companyAspenTechs should suss out and determine an acceptable level of risk. It involves determining reasonable level of risk in-line with appropriate opportunity to gainRecommendationNet Foreign Exchange Exposure (Operational Hedging)AspenTechs Value at Risk, 1995 (95% confidence level)UK PoundGerman DMBelgian FrancJapane se YenExpenses in localcurrency3,129722158,223414,793Monthly Std.Deviation2.90%2.80%2.70%3.00%ExchangeRate*1.58730.67110.03260.0106Total*Average exchange rate (U.S. dollar per unit of foreign currency) over fiscal year 1995VaR$23822230218$707AspenTechs Net Foreign Exchange Exposure (000) by Currency, 1995 Cash InflowsUK PoundGerman DMBelgian FrancJapanese YenCurrent Sales1,7241,015308,984Prior Sales981577175,781Cash OutflowsExpenses3,129722158,223414,793AspenTech should hem in only the net exposure Net foreign exchange exposure in German and Japan Forward contract for Belgians operating expenseNet Exposure(424)870(158,223)69,972RecommendationLiquidity & Credit Risk AspenTech should look other possibility to deal with other financialinstitution to increase their negociate position to GE and Sanwa With higher bargaining position, AspenTech can get lower cost and better position in managing their credit risk Maximize in selling long term receivable firstRecommendationOthers Hedging I nstrument Plain-Vanilla Optionsgive the purchaser of the option the right but not the obligation to buy (call) or sell (put) a specific amount of currency at a predetermined strike price (exchange rateHigh cost Average-Rate Options place rate are calculated as an average over a period Transaction possible during the expiry period at some(prenominal) predetermined dates Strike rate can be fixed or floating Knock-in/knock-out Options Does not provide full protection The key is in determining the barrier rate Low cost Cross-currency transactions Foreign currency money-market borrowingRecommendation Others Hedging Instrument Cross-currency transactions transaction basically does not provide ability to hedge or arrest any risk provide probability of arbitrage if there is a difference between cross rate and indirect rate. Foreign currency money-market borrowing Borrowing in the money market, rather difficult to use since the company need to determine level of debt that matched with its cash inflow from other matched currency