CAPITAL BUDGETING ASSIGNMENT Xiaomi INVESTMENT DECISION Xiaomi is a Chinese multinational company operating in Tech Hardware and Semiconductors industry. The Group plans to make a new investment in the innovative and profitable home automation sector. The project requires an initial investment of 5.000.000 to purchase new plants and equipment. The management intend launch the project in December 2022. Furthermore, at the beginning of the year 2025, the company plans to invest an additional 1.000.000 to build a new factory in India. The aim is to meet increased demand and benefit from lower production costs. To implement the project, Xiaomi needs to use a large building as a laboratory. Management decides to choose a building already owned by Xiaomi that had previously been leased to another company, for 250.000 per year Xiaomi already produces smartphones with a proprietary MIUI operating system (from Android OS). The opportunity to improve connectivity between smartphones, PCs and homes could allow Xiaomi to generate great synergies. Management estimate that the new project will generate incremental revenues on smartphones and PCs of approximately 200.000 per year. Following these investments, the Xiaomi marketing manager provides the following sales estimates for the next few years: Year Domotics Product 2023 50.000 2024 55.000 2025 60.000 2026 65.000 2027 70.000 The average selling price for each house automation product is 45.00 The manufacturing division estimates an average production cost (COGS) of approximately 15.00 for each house automation product. The factory in India will be completed at the beginning of 2025. From then on, the average production cost (COGS) will drop to 12.5 per product. Revenues and COGS must be indexed at an inflation rate of 2%, starting from 2023 (inclusive). The project is expected to end in 2027, due to technology obsolescence and the need to renew all product lines. All products deplete their useful life at the end of 2027, with the exception of one plant that is being sold for 150.000. Investments are amortized using the linear method. The NWC will have a new structure due to entry into the new automation market. The sales manager, warehouse manager and CFO estimate the following NWC. Question 1 On the basis of the information provided, please calculate the Net Present Value and the IRR of the project and to give your opinion on the convenience to undertake it. If the estimated selling price was too high and the market would be willing to buy the home automation products at a price of 40.00, would the project still be acceptable? What is the minimum price at which Xiaomi can sell the product without making any loss? (Hint: Solve through Excel's goal seek function). Question 2 Design a Qualitative and Quantitative Risk Analysis by considering the potential variation on some of the key variables, the probability of the event and the impact on the outcomes. Make assumptions, briefly motivate them and design a best and a worst scenario. After setting those assumptions, apply the new hypothesis on the analysis made and verify the final impact on the NPV and IRR in order to assess under which circumstances it may be convenient to implement the project or not. Year NWC 2023 500.000 2024 700.000 2025 900.000 2026 1.100.000 2027 1.300.000 Xiaomi's Finance Division estimate a cost of capital of 8%. The corporate tax rate is 35%.