Baxil Electronics A Case Study

Baxil Electronics is a midsized electronics manufacturer located in

Japan. The company president is Shexana, who inherited the company.

When it was founded over 60 years ago, the company originally repaired

radios and other household appliances. Over the years, the company

expanded into manufacturing and is now a reputable manufacturer of

various electronic items. Jay, a recent MBA graduate, has been hired by

the company's nance department. One of the major revenue-producing

items manufactured by Baxilis a personal digital assistant (PDA). Baxil

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 colors and is pre programmed to play Jimmy Buffett music.

However, as with any electronic item, technology changes rapidly, and

the current PDA has limited features in comparison with newer models.

Baxil spent $750,000 to develop a prototype for a new PDA that has all

the features of the existing PDA 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 gures for the new PDA. (Hint;

both $750,000 and $200,000 are considered under sunk

cost)

Baxil can manufacture the new PDA for $155 each in variable

costs. Fixed costs for the operation are estimated to run $4.7 million per

year. The estimated sales volume is 74,000, 95,000, 125,000, 105,000,

and 80,000 per each year for the next ve years, respectively. The unit

price of the new PDA will be $360. The necessary equipment can be

purchased for $21.5 million and will be depreciated on a five years

straight line method. It is believed the value of the equipment in ve

years will be $4.1 million.

As previously stated, Baxil currently manufactures a PDA.

Production of the existing model is expected to be terminated in two

years. If Baxil does not introduce the new PDA, sales will be 80,000 units

and 60,000 units for the next two years, respectively. The price of the

existing PDA is $290 per unit, with variable costs of $120 each and

xed costs of $1,800,000 per year. If Baxil does introduce the new PDA,

sales of the existing PDA will fall by 15,000 units per year starting from

third year, and the price of the existing units will have to be lowered to

$255 each. Net working capital (NWC) for the PDAs will be 20 percent of

sales and will occur with the timing of the cash ows for the year; for

example, there is no initial outlay for NWC, but changes in NWC will rst

occur in year 1 with the rst year's sales. Baxil has a 35 percent

corporate tax rate and 18 percent required return.

Additionally, because of rapid changes in technology, she was

concerned that a competitor could enter the market. This would likely

force Baxil to lower the sales price of its new PDA. For these reasons,

she has asked Jay to analyze how changes in the price of the new PDA

and changes in the quantity sold will affect the NPV with a required

return of 12% instead of 18% of the project. Shelley has asked Jay to

answering the following questions.

QUESTIONS:

1. What are the factors they may influence producing PDA?

2 What are methods available to evaluate the project? Discuss in

detail? (Answering this question may require some research)

3. What is the payback period of the new PDA project?

4. What is the protability index of the new PDA project?

5. What is the IRR of the new PDA project?

6. How sensitive is the NPV to changes in the price of the new

PDA applying required return 12%?

7. How sensitive is the NPV to changes in the quantity sold of the

new PDA applying required return 12%?

8. Would you like to proceed with this investment during the corona

virus period? Discuss in support of your answer.