Electron Americas can manufacture the new smartphones at 50% of the sales revenue. Fixed costs for the
Question:
Electron Americas can manufacture the new smartphones at 50% of the sales revenue. Fixed costs for the operation are estimated to run $4.3 million per year. The estimated sales volume is 75,000, 95,000, 125,000, 130,000, and 140,000 per year for the next five years, respectively. The unit price of the new smartphone will be $650. The necessary equipment can be purchased for $61 million and will be depreciated in seven years using straight life depreciation method. It is believed the value of the equipment in five years will be $3.4 million.
The effective tax rate for the company is 35%. The project requires no initial NWC investment, and it requires an NWC balance equal to 15% of sales, after that. The required return for the project is 12%.
Tax rate | 35% |
NWC (% of sales) | 15% |
Required return | 12% |
Required Discounted Payback Period (years) | 3 |
Based on the information, answer the following questions:
- What is the NPV of the project (Hints: first determine the project cash flow in each year)? Based on your analysis of NPV, should the company accept the project?
- What is the discounted payback period of the project? Based on your analysis of discounted payback period, should the company accept the smartphone project if the benchmark discounted payback period is three years?
- What is the profitability index (PI) of the project? Based on your analysis, should the company accept the project?
Fundamentals Of Corporate Finance
ISBN: 9781265553609
13th Edition
Authors: Stephen Ross, Randolph Westerfield, Bradford Jordan