CASE 3 ZZ TOP TECHNOLOGY INC

CHAPTER 9

ZZ Top is a small technology company in Dublin, Ireland. The company started 70 years ago developing communication equipment for military organizations around the globe. The company, in a desire to diversify, has developed a reputation in specialty communication equipment to consumers. ZZ has developed a new smart phone that can do all things an Apple iphone can do, but has added an impressive array of medical tests, such as EKG and heart rate, that are available instantly to the owner of their smart phone.

You have just graduated from Lee and are interviewing with ZZ for a job in their Finance Department. ZZ has an unusual interview process. Rather than a face-to-face meeting, ZZ has sent you details of the proposed new smart phone project. If you can calculate the NPV, IRR and Payback Period of this project you will be hired at a very handsome salary.

The details of the project include spending $1.2 million to develop a prototype and $250,000 for a marketing study to determine expected sales. ZZ can manufacture the new phone for $210 variable costs. Fixed costs for the project will be $5.3M per year. The estimated sales volumes are 64,000, 106,000, 87,000, 78,000, and 54,000 per year for each of the next five years. The unit price of the new phone will be $515. The equipment necessary to do the project will cost $38.5M and will be depreciated using the straight-line method. It is thought that the value of the equipment will have a value of $5.8M at the end of the project. Initial NWC is $250,000 and will then be 20% of sales for each of the projects five years.

ZZ has a corporate tax rate of 22% and a required return of 12%.

To get the job, ZZ has asked you to develop a Pro Forma Cash Flow statement on an Excel spreadsheet and calculate the IRR, NPV, and Payback period for this project. You must submit this next Tuesday, April 14 to your Finance professor by email who will grade them and send results to ZZ Top.