Project #26968 - case study

Wayne Electronics, Inc. is a manufacturer of tablet computers. Its current model is selling excellently. However, in order to cope with the forseeable competition with other like tablet computer models, WE spent $1,720,000 to develop a prototype for a new tablet computer model that includes both features of the existing model and some new features such as enhanced resolution and sound effects for video games. The company had also spent a further $540,000 to study the marketability of the new model.

WE is able to manufacture the new model at a variable cost of $650 per unit.  The total fixed costs for the operation are expected to be $5 million per year.  WE expects to sell 1,200,000 units, 1,250,000 units, 1,500,000 units, 1,200,000 units, and 800,000 units of this new model per year over the next five years respectiviely.  The new model will be selling at a price of $820 per unit.  To launch this new line of production, WE needs to invest $80 million in equipment which will be depreciated on a seven-year MACRS schedule. The value of the used equipment is expected to be worth $600,000 as at the end of the 5-year project life.

WE is planning to stop producing the existing model entirely in two years. Should WE introduce the new model, sales per year of the existing model will be $850,000 units and 385,000 units for the next two years respectively.  The existing model can be produced at variable costs of $580 per unit and total fixed costs of $2.5 million per year.  The old model is selling for $780 per unit.  If WE produces the new model, sales of the existing model will be eroded by 600,000 units and 200,000 units per year for the next two years. In addition, to promote sales of the existing model alongside the new model, WE has to reduce the price of the existing model to $620 per unit.  Net working capital for the tablet computer will be 12 percent of sales and will vary with the occurrence the cash flows. As such, there will be no initial NWC required.  The first change in NWC is expected to occur in year 1 according to the sales of the year.  WE is currently in the tax bracket of 35% and it requires a 14% return on all of its projects.

ou have just been hired by WE as a financial consultant to advise them on this new tablet computer project. You are expected to provide answers to the following questions to their management by their next meeting.

1. Summary of 350 words about the background description of this case including what you are asked to do about it.

2. What is/are the sunk cost(s) for the new tablet computer project? Briefly explain. You have to tell what sunk cost is and the amount of the total sunk cost(s). In addition, you have to advise WE on how to handle such costs(s).

3. What are the cash flows of the project for each year?

4. What is the payback period of the project? Should it be accepted if WE requires a payback of 3 years for all projects?

5. What is the profitability index of the project?

6. What is the internal rate of return of the project?

7. What is the net present value of the project?

8. Should the project be accepted based on PI, IRR, and NPV? Briefly explain.

Subject Business
Due By (Pacific Time) 04/11/2014 12:00 am
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