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The Cheaptalk Phone Company plans to launch a new smart phone, the CheapPhone 5. The...

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Finance

The Cheaptalk Phone Company plans to launch a new smart phone, the CheapPhone 5. The new equipment required to make the phones is expected to cost $12,400,000 and will be depreciated using the 3-year MACRS depreciation schedules (relevant depreciation rates are 33% in year 1, 45% in year 2, 15% in year 3 and 7% in year 4). At the end of three years the equipment can be sold for 10% of its purchase price. The firm expects that 100,000 phones will be sold each year for the next 3 years. Total fixed costs are $750,000 each year, variable costs are $220 per phone, and the phones are sold at $330 each. The initial investment in Net Working Capital (NWC) is $3,500,000. At the end of the project, the investment in NWC is expected to be fully recovered. If the new project is taken, there will be a negative effect on the firms existing phone (CheapPhone 4) cash flow from the firms existing phones will decrease by $50,000 on a post-tax basis in years 1, 2, and 3. The tax rate is 40% and the firms cost of capital is 12.4%. Compute the (i) payback period, (ii) NPV, (iii) IRR, and (iv) profitability index of the project.

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