Our modern and tech-focused world allows us to fall into a sedentary lifestyle easily. We are often plugged into our computers at work, spend time on devices at home, and have automated home systems that can turn on our lights or TVs. Yet, technology can also encourage us to improve our health by giving us greater access to physical therapy, telemedicine, or even helping us stay on top of our medications and manage diabetes.

Today, the rise of smartwatches and wearables like the Fitbit and the Apple Watch is revolutionizing healthcare in an entirely new way by allowing us to take charge of our physical and mental well-being right from our wrists. Wearable devices smartwatches are quickly becoming indispensable technologies in the healthcare industry. For patients, smartwatches can monitor your heart rate, sleep habits, and physical activity. For doctors, patients can then take that information and share it with their physician to gain valuable insight around your health to make alterations that could improve your overall well-being. Smartwatches also improve your well-being by giving you access to apps designed around specific health conditions like diabetes. They also grant you access to tons of fitness, dieting, and mental health apps that encourage us to maintain a healthy lifestyle more conveniently than ever. Nekia Corporation plans to launch the new Smartwatch ZT 3000 in January 2023 and is currently in the evaluating stage. It required input from sales and marketing, technology engineers, manufacturing, and finance. The data were organized and thorough, and need your team to come up with a compelling analysis and a recommendation about whether to proceed. The top management and CEO were excited at the idea Smartwatch ZT 3000 and plan to engage Lee Zii Jia (Malaysian professional badminton player) to be the spokesperson of the new product. But top management also knew that all the excitement and flash in the world could not make up for a project if the financials did not work.

Project 1 : Smartwatch ZT3000

The business case team had compiled the following baseline information surrounding the Smartwatch ZT 3000 project:

1. The life of the Smartwatch ZT 3000 project was expected to be six years. Assume the analysis took place at the end of 2022.

2. The suggested retail price of the smartwatch was RM250. Gross margins for high-end wearables averaged about 40% at the retail level, meaning each watch sold would net Nekia Corporation RM150.

3. The global wearables market in 2021 totaled approximately RM74.5 billion and was expected to grow at 1.8% from 2021 to 2028, reaching RM84.4 billion by 2028. Based on market research and analysis of other recent athlete endorsements, the Nekia Corporation marketing division estimated the following sales volumes for Smartwatch ZT 3000:

Year	2023	2024	2025	2026	2027	2028
Number Sold(millions	1.1	2.0	1.3	`1.4	1.5	1.0

4. The 2024 number assumed Lee Zii Jia participated in the 2024 games in Paris and won at At least one medal.

5. For the first two years, the introduction of Smartwatch ZT 3000 would reduce sales of existing Nekia Corporation phone as follows:

a. Lost sales: 2023: RM38 million 2024: RM17 million

b. Assume the lost revenue had the same margins as Smartwatch ZT 3000.

6. In order to produce the smartwatch, the firm needed to build a new factory in Batu Kawan. This required an immediate outlay of RM155 million, to be depreciated at 10% per annum using the straight-line method. The firm’s analysts estimated the building would be sold for RM22 million at project termination.

7. The company must immediately purchase equipment costing RM18 million. Freight and installation of the equipment would cost RM6 million. The cost of equipment and freight/installation was to be depreciated at 15% per annum using the straight-line method It was believed the equipment could be sold for RM3 million upon project termination.

8. Fixed assets can claim capital allowance on a 25% reducing balance basis. A balancing allowance is claimed in the final year of operation.

9. In order to manufacture Smartwatch ZT 3000, two of the firm’s working capital accounts were expected to increase immediately. Approximately RM15 million of inventory would be needed quickly to fill the supply chain. In the year 2025, the working capital needed would be RM17 million. All working capital would be recovered at the end of the project by the end of the sixth year.

10. Variable costs were expected to be 60% of revenue.

11. Selling, general, and administrative expenses were expected to be RM8 million per year.

12. Lee Zii Jia would be paid RM3 million per year for his endorsement of Smartwatch ZT 3000, with an additional RM1 million Olympic bonus in 2024.

Other advertising and promotion costs were estimated as follows:

Year	2023	2024	2025	2026	2027	2028
A&P Expense (millions)	RM 26	RM 19	RM15	RM20	RM18	RM14

13. Nekia Corporation had already spent RM2 million in research and development on Smartwatch ZT 3000.

14. The Smartwatch ZT 3000 project was to be financed using a combination of equity and debt. The interest costs on the debt were expected to be approximately RM1.2 million per year. The Nekia Corporation discount rate for new projects such as this was 11%.

15. Nekia Corporation’s effective tax rate was 24%. The tax is payable one year in arrears.

Project 1: Smartwatch ZT 3000

1. Which cash flows should be incorporated into the project’s forecast? Why or why not?

2. Does Smartwatch ZT 3000 appear attractive from a quantitative standpoint? To answer this question, estimate the project’s payback, net present value, and internal rate of return.

3. Suggest strategic factors that should be considered before Nekia undertakes the project.

Answer rating: 100% (QA)

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