In order to tap the growing gaming market. Penang Technologies Sdn Bhd. an R&D start-up. had spent
Question:
In order to tap the growing gaming market. Penang Technologies Sdn Bhd. an R&D start-up. had spent RM10 million over the past two years to develop a new game console with a unique home-and-away design that allows its users to play their favourite titles on a big-screen TV when docked or in handheld mode when outdoors. It is especially appealing for commuters or people with busy lifestyles. The company managed to raise funding from a group of venture capitalists and the weighted average cost of capital is 10%. The company has made the following estimate of the sales of the new game console which is expected to have a life of 5 years. Working capital of RM20 million is required.
| Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | |
| Forecast unit sales (Mil) | 13 | 16 | 15 | 13 | 12 |
| Selling price per unit (RM) | 45.00 | 43.00 | 42.00 | 40.00 | 38.00 |
| Production costs per unit (RM) | 30.00 | 31.50 | 33.08 | 34.73 | 36.47 |
| Annual Marketing costs (RM'Mil) | 30 | 25 | 20 | 20 | 20 |
| Annual Overheads, excluding depreciation (RM'Mil) | 50 | 55 | 60 | 65 | 70 |
The directors are considering two mutually exclusive options to manufacture the new product.
(a) The company will acquire new equipment at a cost of RM250 million to manufacture the new game console. The residual value of the equipment is expected to be RM5 million at the end of 5 years.
(b) The company can outsource the manufacturing to Oriental Electronics Berhad, a leading manufacturer of game consoles based in China. The company will pay Oriental Electronics RM 32 for each unit of console produced with the price increasing by 5 percent annually.
REQUIRED:
1. Evaluate the feasibility of both options based on the following methods
(a) Net Present Value Method; (24 marks)
(b) Internal Rate of Return Method (4 marks)
(c) The Payback Period Method; (4 marks)
2. Critically discuss the merits and risks of each of the options and recommend the option that should be adopted. (8 marks) URGENT !!! PLEASE ANSWER ASAP!!!! ANSWERS MUST BE TYPED!!! SHOW WORKINGS AND CALCULATIONS!!! THANKS
Expert Answer:
Sure lets start with the evaluation of both options using the given methods Option a Acquire New Equipment Net Present Value NPV Method 1 Calculate the cash flows Initial investment RM250 million Annu... View the full answer
