Confederation Electronics is ad mid-sized electronic s manufacturer located in Markham, Ontario. The company president is Shelly Couts, who inherited the company. The company originally repaired radios and other household appliances when it was founded over 70 years ago. Over the years, the company has expanded, and it is now a reputable manufacturer of various specialty electronic items. Jay McCanless, a recent MBA graduate, has been hired by the company in its finance department.
One of the major revenue-producing items manufactured by Confederation Electronics is a Personal Digital Assistant (PDA.) Confederation Electronics currently has one PDA model on the market and sales have been excellent. The PDA is a unique item in that it comes in a variety of tropical colours and is preprogrammed to paly Jimmy Buffet music. However, as with any electronic item, technology changes rapidly, and the current PDA has limited features in comparison with newer models. Confederation Electronics spent $750,000 to develop a prototype for a new PDA that has all the features of the existing one, but adds new features such as cell phone capability. The company has spent a further $200,000 for a marketing study to determine the expected sales figures for the new PDA.
Confederation Electronics can manufacture the new PDA for $86 each in variable costs. Fixed costs for the operation are estimated to run $3 million per year. The estimated sales volume is 70,000, 80,000, 100,000, 85,000, and 75,000 per each year for the next five years, respectively. The unit price of the new PDA will be $250. The necessary equipment can e purchased for $15 million and falls in CCA Class 43, with a 30 percent rate. When the project is completed, Confederation Electronics will have other assets remaining in that CCA asset class. It is believed the value of the equipment in five years will be $3 million.
Net working capital for the PDAs will be 20 percent of sales and will occur with the timing of the cash flows for each year (i.e., there is no initial outlay for NWC). Changes in NWC will thus first occur in Year 1 with the first year's sales. Confederation Electronics has a 35 percent corporate tax rate and a 12 percent required return.
question.
1.What is the payback period of the project?
2.What is the profitability index of the project?
3.What is the IRR of the project?
4.What is the NPV of the project?
5.How sensitive is the NPV to changes in the price of the new PDA?
6.How sensitive is the NPV to changes in the quantity sold?
7.Should this company produce the new PDA?
8.Suppose this company loses sales on other models because of the introduction of the new model. How would this affect your analysis?