Case Study

The company has spent a further $200,000 for a marketing study to determine the expected sales figures for the new smartphone.

The company can manufacture the new smartphone for $205 each in variable costs. Fixed costs for the operation are estimated to run $5.1 million per year. The estimated sales volume is 64,000, 106,000, 87,000, 78,000, and 54,000 unit per year for the next five years, respectively.

The unit price of the new smartphone will be $485. The necessary equipment can be purchased for $34.5 million and will be depreciated on a seven-year MACRS schedule. It is believed the value of the equipment in five years will be $5.5 million.

Net working capital for the smartphones will be 20% of sales and will occur with the timing of the cash flows for the year (i.e. there is no initial outlay for the first year's sales. XYZ has a 35% corporate tax rate and required return of 12%.

Part 1-

4.How sensitive is the NPV to change in the price of the new smartphone (assume that the price goes done to $370)?

5.How sensitive is the NPV to change in the quantity sold (assume that quantity reduce by 10%)?

Part 2-

1.What is a break-even?

2.What are the degrees of operating and financial leverage?