Capital Budgeting Case

SmartCam Company has an opportunity to produce and sell an innovative new smart home camera for homes. To determine whether this would be a profitable and lucrative venture, the company has gathered the following data on probable costs and market potential.

1. New equipment would have to be acquired to produce the smart home camera. The equipment would cost $100,000 and be usable for 12 years. After 12 years, it would have a salvage value equal to 10% of the original cost.

2. Production and sales of the smart home camera would require a working capital investment of $40,000 to finance accounts receivable, inventories, and day-to-day cash needs. This working capital would be released for use elsewhere after 12. (hint: this is a cash outflow at the beginning of the project and a cash inflow at the end of the project)

3. An extensive marketing study projects sales in units over the next 12 years as follows.

Year/Years	Sales in Units (each year)
1	4,000
2	7,000
3	10,000
4-12	12,000

D. The smart home camera would sell for $45 each; variable cost for production, administration and sales would be $25 per unit.

E. To gain entry into the market, the company would have to advertise heavily in the early years of sales. The advertising program follows.

Year	Amount of yearly advertising
1-2	$70,000
3	$50,000
4-12	$40,000

F. Other fixed costs for salaries, insurance, maintenance, and straight-line depreciation on equipment would total $107,500 per year (Depreciation is based on cost less salvage value.)

G. The income tax rate is 30%.

G. The companys required rate of return is 20%.

A. Cash Flows - Year 1 2 3 4 thru 12 Sales Variable Costs Contribution Margin Fixed Costs Advertising Other Total Fixed Costs Net cash flow B. NPV Amount Factor PV CF Cash In-Flows Year 1 Year 2 Year 3 Year 4-12 SV of Equipment Release WC Total Cash In-Flows Cash Out-Flows Investment in Equipment Working Capital Investment Total Cash Out-Flows Net Present Value