AugRealElectronics is a midsized electronics manufacturer. Thecompany president is Shelly Couts, who inherited the company. Thecompany originally repaired radios and other household applianceswhen it was founded over 70 years ago. Over the years, the companyhas expanded, and it is now a reputable manufacturer of variousspecialty electronic items. You, a recent businessschool graduate, have been hired by the company in its financedepartment.
One of the major revenue-producing items manufactured by AugRealis a smart phone. AugReal currently has one smart phone model onthe market and sales have been excellent. The smart phone is aunique item in that it comes in a variety of tropical colors and ispreprogrammed to play Jimmy Buffett music. However, as with anyelectronic item, technology changes rapidly, and the current smartphone has limited features in comparison with newer models. AugRealspent $750,000 to develop a prototype for a new smart phone thathas all the features of the existing one but adds new features suchas Pokémonluring and capturing. Thecompany has spent a further $200,000 for a marketing study todetermine the expected sales figures for the new smart phone.
AugReal can manufacture the new smart phone for $205 each invariable costs. Fixed costs for the operation are estimated to run$5.1 million per year. The estimated sales volume is 64,000,106,000, 87,000, 78,000, and 54,000 per year for the next fiveyears, respectively, and no sales after the fifth year. The unitprice of the new smart phone will be $485. The necessary equipmentcan be purchased for $34.5 million and will be depreciated on aseven-year MACRS schedule (see Table 6.3, p. 175). It isbelieved the value of the equipment in five years will be $5.5million.
Net working capital for the smart phones will be 20 percent ofsales and will occur with the timing of the cash flows for the year(i.e., there is no initial outlay for NWC). Changes in NWC willthus first occur in Year 1 with the first year's sales. AugReal hasa 35 percent corporate tax rate and a required return of 12percent.
Shelly has asked you to prepare a report that answers thefollowing questions:
QUESTIONS
- What is the payback period of the project?
- What is the profitability index of the project?
- What is the IRR of the project?
- What is the NPV of the project?
- Should AugReal produce the new smart phone?
REPORT STYLE
Rememberthat your boss is a smart business person, but she is not afinancial analyst like you. You should lead her throughthe logic of your analysis to your conclusions. Be sure your reportis accurate and professional: your job (grade) is on theline!
The report should be single-spaced within paragraphs and doublespaced between paragraphs. Use headings for majorsections. Include page numbers. Use Times12-point font. Pay attention to grammar and writingstyle. Write your report in third person, activevoice. Include Excel Worksheet Objects as tables in thebody of your report that show the numbers involved in youranalysis. Include a memo to your boss as thecover/transmittal page. The memo should present yourprimary conclusions in a bullet list.
Your submission should be a single Word document (maximum of 6pages) uploaded into Canvas. I will use the attachedrubric in the grading process. “Paste object” to putyour cash flows from Excel into your Word file. This allows me tosimply click on your tables to see the match behind yourcalculations. DO NOT USE EXCEL LIKE ATYPEWRITER. That is, let Excel do thecalculations. Don’t do the calculations with pen andpaper or a calculator and then simply type in the numbers into anExcel sheet. I want to see that you can use Excel forthis assignment and that you understand the concept of pasting anobject rather than a picture from Excel to Word. Failureto use Excel in the manner described will result in a significantgrade penalty (50%?) even if your numbers are technicallycorrect.
