Huawei has spent 1.5B in R&D and is ready to launch the first foldable cellphone Mate X.
Question:
Launch year | Year+1 | Year+2 | Year+3 | |
Revenue | 17000*X | 15000*0.5X | ||
COGS | 8000*X | 7000*0.5X | ||
Overhead | 1.8B | 0.5B | ||
CAPEX | 3.6B | |||
Depreciation | 1.2B | 1.2B | 1.2B | |
Required NWC | 0 | 1000*X | 500*X | 0 |
(1) Calculate the project NPV at the time of launch date as a function of X.
Suppose if they launch the phone in year 0, there is a 60% chance that consumers like the product, and X will be 1 million units. There is a 40% chance that consumers are disappointed about the product, and X will be 0.2 million units. If they launch the phone in year one, they will know whether consumers like foldable phones or not, and they can choose to not launch if situation is unfavorable. If they launch the phone in year 1 and the consumers like foldable phones, X will be 0.9 million. If they launch in year 1 even though consumers do not like foldable phones, X will be 0.2 million.
(2) What is the NPV if they launch in year 0?
(3) What is the NPV at year 1 if they launch in year 1? Calculate the NPV for both scenarios. Should they launch the phone if it is revealed that consumers do not like foldable phones?
(4) What is the option value of delaying the launch?
Advanced Accounting
ISBN: 978-0078025402
11th edition
Authors: Joe Ben Hoyle, Thomas Schaefer, Timothy Doupnik