Question: How sensitive is the NPV to changes in the price of the new smartphone How sensitive is the NPV to changes in quantity sold Should

 How sensitive is the NPV to changes in the price of

the new smartphone How sensitive is the NPV to changes in quantity

  1. How sensitive is the NPV to changes in the price of the new smartphone
  2. How sensitive is the NPV to changes in quantity sold
  3. Should LSV produce the new smartphone

Creative Electronics is a mid-size electronics manufacturer located in Plano, Texas. Hoss Wright inherited the company from his father and now serves as its president. The company was started 60+ years ago and originally repaired radios and other small appliances. Since its inception, the company has greatly expanded and now manufacturers various specialty electronic items. Abilene Torres, a recent graduate from Rice University's MBA program was hired into the company's finance department. One of EC's major revenue producing products is its smartphone. EC is currently marketing one smartphone. EC's smartphone is unique in that its casing comes in a variety of patterns representing different cowboy boot animal skins. Best sellers include alligator, ostrich, snake and goat. The phone is also pre-programmed to play the music of Lyle Lovett, a famous and beloved artist in the southwest. However, technology in the smartphone industry is changing rapidly and EC's current smartphone has limited features compared with newer models. EC spent $750,000 to develop a prototype for a new smartphone that has all the features of its existing smartphone but added new features such as 5G internet capability and under-screen sensors. The company has additionally spent $200,000 for a marketing study to determine the expected sales figures for its new smartphone. EC can manufacture the new smartphone for variable costs of $205/unit. Fixed costs are estimated to run $5.1million per year. Estimated 5-year sales volume in units: Year 1 S 64.000 Year 2 106,000 Year 3 87,000 Year 4 78,000 Year 5 54,000 Price per smartphone - $485 Production equipment can be purchased for $34.5 million and depreciated on a seven-year MACRS schedule. Useful life of equipment - 5 years Market Value of equipment $5.5 million Net working Capital (NWC) = 20% of sales ( will occur with yearly timing of cash flows - meaning there is no initial outlay for NWC $ and that changes in NWC will occur in Year 1 with the first year's sales. (1.2. end yearl NWC same as beginning NWC in year 2 = 20% of year 1 sales) Tax Rate 35% Required rate of return 12% Sales each year = quantity sold * price VC each year = quantity sold * VC The pro forma income statement and cash flow for the 5 years are listed below Sales Sales VC Fixed costs Depreciation EBT Year 1 $31,040,000 13,120,000 5,100,000 4,930.050 $7,889,950 2,761,483 $5,128,468 4,930,050 $10,058,518 Year 2 $51,410,000 21,730,000 5,100.000 8,449,050 $16,130,950 5,645,833 $10,485,118 8,449,050 $18,934,168 Year 3 $42,195,000 17,835,000 5,100,000 6,034,050 $13,225,950 4,629,083 $8,596,868 6,034,050 14,630,918 Year 4 $37,830,000 15,990,000 5,100,000 4,309,050 $12,430,950 4,350.833 $8,080.118 4,309,050 12,389,168 Year 5 $26,190,000 11,070,000 5,100,000 3,080,850 $6,939,150 2,428,703 $4,510,448 3,080,850 $7,591,298 Tax NI + Depreciation OCF NWC Beg End $0 6,208,000 -$6,208,000 $6,208,000 10,282,000 -$4,074,000 10,282,000 8,439,000 $1,843,000 $8,439,000 7,566,000 $873,000 $7,566,000 0 NWC CF $7,566,000 Net CF inflows $3,850,518 $14,860,168 16,473,918 13,262,168 15,157,298 BV of equipment = $34,500,000 4,930,050 8,449,050 6,034,050 4,309,050 - 3,080,850 = BV of equipment = Taxes on sale of equipment = (BV-MV) (tax rate) = CF on sale of equipment = $5,500,000 + 768,933 = $6,268,933 Creative Electronics is a mid-size electronics manufacturer located in Plano, Texas. Hoss Wright inherited the company from his father and now serves as its president. The company was started 60+ years ago and originally repaired radios and other small appliances. Since its inception, the company has greatly expanded and now manufacturers various specialty electronic items. Abilene Torres, a recent graduate from Rice University's MBA program was hired into the company's finance department. One of EC's major revenue producing products is its smartphone. EC is currently marketing one smartphone. EC's smartphone is unique in that its casing comes in a variety of patterns representing different cowboy boot animal skins. Best sellers include alligator, ostrich, snake and goat. The phone is also pre-programmed to play the music of Lyle Lovett, a famous and beloved artist in the southwest. However, technology in the smartphone industry is changing rapidly and EC's current smartphone has limited features compared with newer models. EC spent $750,000 to develop a prototype for a new smartphone that has all the features of its existing smartphone but added new features such as 5G internet capability and under-screen sensors. The company has additionally spent $200,000 for a marketing study to determine the expected sales figures for its new smartphone. EC can manufacture the new smartphone for variable costs of $205/unit. Fixed costs are estimated to run $5.1million per year. Estimated 5-year sales volume in units: Year 1 S 64.000 Year 2 106,000 Year 3 87,000 Year 4 78,000 Year 5 54,000 Price per smartphone - $485 Production equipment can be purchased for $34.5 million and depreciated on a seven-year MACRS schedule. Useful life of equipment - 5 years Market Value of equipment $5.5 million Net working Capital (NWC) = 20% of sales ( will occur with yearly timing of cash flows - meaning there is no initial outlay for NWC $ and that changes in NWC will occur in Year 1 with the first year's sales. (1.2. end yearl NWC same as beginning NWC in year 2 = 20% of year 1 sales) Tax Rate 35% Required rate of return 12% Sales each year = quantity sold * price VC each year = quantity sold * VC The pro forma income statement and cash flow for the 5 years are listed below Sales Sales VC Fixed costs Depreciation EBT Year 1 $31,040,000 13,120,000 5,100,000 4,930.050 $7,889,950 2,761,483 $5,128,468 4,930,050 $10,058,518 Year 2 $51,410,000 21,730,000 5,100.000 8,449,050 $16,130,950 5,645,833 $10,485,118 8,449,050 $18,934,168 Year 3 $42,195,000 17,835,000 5,100,000 6,034,050 $13,225,950 4,629,083 $8,596,868 6,034,050 14,630,918 Year 4 $37,830,000 15,990,000 5,100,000 4,309,050 $12,430,950 4,350.833 $8,080.118 4,309,050 12,389,168 Year 5 $26,190,000 11,070,000 5,100,000 3,080,850 $6,939,150 2,428,703 $4,510,448 3,080,850 $7,591,298 Tax NI + Depreciation OCF NWC Beg End $0 6,208,000 -$6,208,000 $6,208,000 10,282,000 -$4,074,000 10,282,000 8,439,000 $1,843,000 $8,439,000 7,566,000 $873,000 $7,566,000 0 NWC CF $7,566,000 Net CF inflows $3,850,518 $14,860,168 16,473,918 13,262,168 15,157,298 BV of equipment = $34,500,000 4,930,050 8,449,050 6,034,050 4,309,050 - 3,080,850 = BV of equipment = Taxes on sale of equipment = (BV-MV) (tax rate) = CF on sale of equipment = $5,500,000 + 768,933 = $6,268,933

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