GPS World S$.$A$.$L$.,$ Part $1$

GPS World S$.$A$.$L$.$ is a medium$-$size company located on

the outskirts of Beirut. Under the general manager Majid

Al Hamli, GPS World has grown from a local electronics

retail store to one of Lebanon's leading manufacturers

and distributor of navigation equipment in only five

years. Today, Majid is meeting with the company's head

of marketing, Omar Al Mansoor, to discuss the develop$-$

ment of a new product, the Map$100,$ a new generation

GPS system with detailed Middle East road and sea area

coverage for driving, boating, or plain walking applica$-$

tions. The new interface of the Map$100$ allows for an

automatic update of the road system and the area's gen$-$

eral infrastructure without the inconvenience of a man$-$

ual download of new maps. Omar's department has

conducted extensive market research to gauge potential

demand for the new product and to sense the amount of

money potential customers are likely to pay for the

Map$100$ features. Based on these findings, Omar and his

team are convinced that at a price of $LL202,500($$$135)$

per unit, $15,000$Map$100$ s could be sold the first year.

With an aggressive marketing campaign, second$-$year

sales could be boosted to $16,000$ units. Unfortunately,

barriers to entry are quite low and new rivals are

expected to increase product supply significantly. As a

result, sales are likely to go down by $500$ units in year $3$

and $4$ after which the annual sales decrease accelerates

to $1,000$ units. The resulting revenue reduction is ampli$-$

fied by an annual unit price decrease of $3$ percent after

year $2.$ Variable costs per unit are LL $70,500($$$47)$ for the

first year and estimated to increase by $4$ percent per

year. First$-$year annual fixed costs are set at LL $600$ mil$-$

lion $($ $$400,000)$ but are likely to go up by LL $15$ million

$($$$10,000)$ per year. The recommended investment period

is only $6$ years, mainly because of the anticipated reduc$-$

tion in profit margins as a result of a combination of

heightened competition and inflationary pressure. The

initial investment of LL $3\mathrm{.}6$ billion $($ $$2\mathrm{.}4$ million$),$ for the

production equipment, will be depreciated according to

the $7-$year asset class MACRS schedule. With the launch

of the project, an immediate net working capital invest$-$

ment of LL $337\mathrm{.}5$ million $($ $$225,000)$ will be required. As

the financial analyst of the company, Majid has asked

you to join the meeting. Based on your estimate of

GPS World's cost of capital of $11\mathrm{.}5$ percent, you perform

the following tasks:

QUESTIONS

Generate pro$-$forma income statements for years $1-6$

and determine the resulting annual operating cash

flows. Assume a corporate tax rate of $15$ percent.

Compute the annual expected net cash flow for

years $1-6,$ assuming that the net working capital

investment will be necessary right away and that

it will be recovered in full at the end of year $6.$ At

the end of the project's intended life $($year $6)$ the

production equipment is expected to be sold at its

book value.

Determine the payback period using the simple and

the discounted method. Do you suggest going ahead

with the project?

Apply the NPV$,$ IRR, and MIRR method to the

computed net cash flows and interpret your results.

Also compute the profitability index. Do your results

support your earlier conclusions about the project's

profitability? $($can someone solve question $2,3,4)$