Capital Budgeting

Electron Americas is a midsized electronics manufacturer located in Key West, Florida. The company president is Michael Scott, who inherited the company. When it was founded over 70 years ago, the company originally repaired radios and other household appliances. Over the years, the company expanded into manufacturing and is now a reputable manufacturer of various electronic items. Recently, you have been hired by the company's finance department.

One of the major revenue-producing items manufactured by Electron Americas is a smart phone. Electron Americas currently has one smart phone model on the market, and sales have been excellent. The smart phone is a unique item in that it comes in a variety of tropical colors and is preprogrammed to play Jimmy Buffett music. However, as with any electronic item, technology changes rapidly, and the current smart phone has limited features in comparison with newer models.

Electron Americas can manufacture the new smart phones for $350 each in variable costs. Fixed costs for the operation are estimated to run $4.25 million per year. The estimated sales volume is 80,000; 90,000; 120,000; 130,000; and 140,000 per year for the next five years, respectively. The unit price of the new smart phone will be $600. The necessary equipment can be purchased for $65 million and will be depreciated on a seven-year MACRS schedule. It is believed the value of the equipment in five years will be $3.5 million.

The effective tax rate for the company is 21%. The project requires no initial NWC investment, and it requires NWC balance equal to 15% of sales, thereafter. The required return for the project is 14%.

3)Question:

A)What is the NPV of the project? Based on your analysis of NPV, should the company accept the project? Use "if" formula to construct "Accept" or "Reject" decision.

B) What is the payback period (PBP) of the project? Based on your analysis of PBP, should the company accept the smart phone project if the required payback period is 3 years? Use "if" formula to construct "Accept" or "Reject" decision.

C) What is the discounted payback period (DPBP) of the project? Based on your analysis of DPBP, should the company accept the smart phone project if the required discounted payback period is 4 years? Use "if" formula to construct "Accept" or "Reject" decision.

D) What is the IRR of the project? Based on your analysis of IRR, should the company accept the project?Use "if" formula to construct "Accept" or "Reject" decision.

E) Provide: Year 1, Year 2, Year 3, Year 4. For the following:

-Equipment Cost

-Salvage value

-Units Price

-Variable cost (per unit)

-Fixed costs (per year)

-Tax rate

-NWC (% of sales)

-Required return

-Required Payback Period (years)

-Required Discounted Payback Period (years)