Baldwin Wooster Corporation manufactures auto parts for domestic and imported automobiles. Their core products have been exhaust systems like mufflers and catalytic converters, and ride control systems like struts and shock absorbers. Five years ago, Baldwin opened a new division Auto Electronics Division with the purpose of capitalizing on the increased customer demand for electronic gadgets for use in automobiles. The division has reputable R&D facilities and produced certain products which have been well accepted by critics and consumers alike. They have produced products like car GPS systems, radar detectors, etc. With less than 5 years experience, Baldwin is somewhat new to the electronic segment, but they would like to be a major player in that segment of the market. Baldwins main competition in the area of exhausts and ride control products is Tenneco, a well run and well managed firm. Its main competition in the electronic products area is Garmin and Tomtom. Baldwins customers are segmented three ways 1) auto manufacturers like GM, Ford, Toyota; 2) auto service specialists like Goodyear, NTB, Firestone; and, 3) end consumers who buy their products via retail outlets like Sears, Best Buy. Recent trends show a significant growth potential in the GPS market primarily because of technological advances leading to low unit cost of the product to the consumer. Also, increased use of cell phones and the risk associated with driving while on the phone has resulted in law enforcement to place significant emphasis on hands free driving. Many municipalities have passed laws making it illegal to use phones while driving. Recently even the State of California with the largest number of registered cars in the nation passed a law making it illegal to drive while using a cell phone. Baldwins strategic management group has looked at the changing environment as an opportunity to create a new product that can appeal to the concerns of the law and yet satisfy consumer thirst for electronic gadgets. Baldwins Electronic Division has patented and developed a new product that has favorable reviews in focus group studies. The product is a combo GPS/Radar Detector/Hands Free Cell Phone unit. The unit performs three functions 1) acts as a GPS device, 2) acts as a radar detector, and 3) acts as a device that converts your regular cell phone to a hands free device. Even though Baldwin has several specific patents in the field, they are market laggard in the electronics product line dominated by companies like Garmin. They are slow in marketing new products even though they have superior technology. In a recent review, the Consumer Reports magazine gave thumbs up by rating the Baldwin GPS unit (GPS only unit) as the Best Value GPS unit in the market when quality is considered in conjunction with price value to the consumer. Naturally, the management is very pleased with the rating given that the competition was the elite group of electronic firms like Garmin and Tomtom. They would like to capitalize on the current sentiments of consumers and other groups by introducing a product that simultaneously appeals to all the concerned groups and thus create value to the consumer. Gomer Pyle is the Chief Operating Officer of Baldwin. He reports to Sergeant Carter, the company president. Lucy McGillicutty is the Chief Financial Officer and Archie Bunker is the Senior Vice President of Marketing. They both report to President Carter. Carter has requested information relevant to the product and the three executives have put together the following information. Product Name BW COMBO a. Sale price of the unit: Most Likely $275.00 each. Optimistic $295 each. Pessimistic $215 each. b. Variable cost: Most Likely $85 each. Optimistic $50 each. Pessimistic $105 each c. Fixed Expenses per year: Most Likely $13 million. Optimistic $10 million. Pessimistic $15 million. d. Expected worldwide unit sales for years 1 thru 8: Most Likely: 246,000; 277,000, 310,000; 310,000; 230,000; 230,000; 230,000; 230,000. Optimistic: Compared to the most likely case, sales are higher by 20% during first four years and 10% in the next 4 years. Pessimistic: Sales will be lower by 15% for years 1 thru 8. e. Impact on current BWC products: The accounting department has estimated that the financial impact of erosion of sales of pure GPS units is $1.8 million per year, and of pure Radar units is $0.5 million per year. Both these are net numbers net of variable costs but before taxes. f. New Purchase: Equipment A, purchased at time zero: $47 million. It is depreciated using 5-yr MACRS method. Equipment B, purchased at time 2: $10 million. It is depreciated using 7-yr MACRS method. Building, built out at time zero: $12.6 million. It is depreciated using 42 year straight line method. g. Net working capital requirements: The net working capital for this project is expected to be 12% of sales. h. Tax rates: The marginal income tax rates are as follows: Federal = 37%, State = 6.2%, Local = 2.9%. Capital Gains Tax rate = Composite Income Tax Rate. i. Minimum acceptable rate of return (MAAR) Before tax MARR is 22% j. Project life and terminal Values The expected life of the project is 8 years. At the end of that life, the equipment is expected to be sold for $6.6 million. This figure is same for both the optimistic and pessimistic cases. The building will not be sold, but will be abandoned and gutted. You have been hired by Vince Carter. You will write a 1 to 2 page report answering the following questions. Attach all relevant spread sheets (these attachments dont count toward the 1 2 page limits on the write up. Your report should have a summary statement of your recommendation along with a discussion of your findings and the rationale behind your recommendation. 1. What is the NPV? 2. What is the IRR? 3. What is the Discounted Payback? 4. What is Profitability Index? 5. Other relevant indicators? 6. Should BWC undertake the venture? Rationalize with sufficient text and supporting scenario analysis.

	MOST LIKELY	OPTIMISTIC	PESSIMINSTIC
SALE PRICE	$ 275.00	$ 295.00	$ 215.00
VARIABLE COST	$ 85.00	$ 50.00	$ 105.00
FIXED EXPENSES PER YR	$ 13,000,000.00	$ 10,000,000.00	$ 15,000,000.00
EXPECTED WORLDWIDE SALES YR 1 -8
	MOST LIKELY	(WORK COLUMN)	OPTIMISTIC	(WORK COLUMN)	PESSIMISTIC
1	$ 246,000.00	$ 49,200.00	$ 295,200.00	$ 44,280.00	$ 250,920.00
2	$ 277,000.00	$ 55,400.00	$ 332,400.00	$ 49,860.00	$ 282,540.00
3	$ 310,000.00	$ 62,000.00	$ 372,000.00	$ 55,800.00	$ 316,200.00
4	$ 310,000.00	$ 62,000.00	$ 372,000.00	$ 55,800.00	$ 316,200.00
5	$ 230,000.00	$ 23,000.00	$ 253,000.00	$ 37,950.00	$ 215,050.00
6	$ 230,000.00	$ 23,000.00	$ 253,000.00	$ 37,950.00	$ 215,050.00
7	$ 230,000.00	$ 23,000.00	$ 253,000.00	$ 37,950.00	$ 215,050.00
8	$ 230,000.00	$ 23,000.00	$ 253,000.00	$ 37,950.00	$ 215,050.00
TAX RATES
federal	37%
state	6.20%
local	2.90%
capital gains tax rate	composite tax rate