FIX & PLAY Electronics FIX & PLAY Electronics is a midsized electronics manufacturer located in Pulau Pinang, Malaysia. The company Chief Executive Officer (CEO) is George Paul, who inherited the company. When it was founded over 50 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. Steven Chan, a recent MBA graduate, has been hired by the company in its finance division One of the major revenue-producing items manufactured by FIX & PLAY Electronics is a Personal Digital Assistant (PDA). FIX & PLAY Electronics currently has one PDA model on the market, and sales have been excellent. The PDA is a unique item in that it comes in a variety of tropical colors and is preprogrammed to play Buffett music. However, as with any electronic item, technology changes rapidly, and the current PDA has limited features in comparison with newer models. FIX & PLAY Electronics spent RM765,000 to develop a prototype for a new PDA that has all the features of the existing one, but adds new features such as cell phone capability. The company has spent a further RM218,000 for a marketing study to determine the expected sales figures for the new PDA. FIX & PLAY can manufacture the new PDA for RM92 each in variable costs. Fixed costs for the operation are estimated to run RM2.8 million per year. The estimated sales volume is 70,000, 75,000, 102,000, 82,000, and 64,000 per each year for the next five years, respectively. The unit price of the PDA will be RM285. The necessary equipment can be purchased for RM20.5 million and will be depreciated on a seven-year MACRS schedule (refer table 1). It is believed the value of the equipment in five years will be RM3.5 million. Net working capital for the PDAs will be 25 percent of sales and will occur with the timing of the cash flows for the year (for example, there is no initial outlay for NWC). Changes in NWC will thus first occur in year I with the first year's sales. FIX & PLAY Electronics has a 35 percent corporate tax rate and a 12 percent required return. George Paul has asked Stephon Chan to prepare a report that answers the following questions: Table 1- Modified Accelerated Cost Recovery System (MACRS) Recovery Year 3-Year 5-Year 7-Year 1 2 3 4 5 33.33 20.00 14.29 44.45 32.00 24.49 14.81 19.20 17.49 7.41 11.52 12.49 11.52 8.93 5.76 8.92 6 7 8.93 4.46 8 Questions: 1. Discuss the importance of capital budgeting in managing investment projects by an organization. 2. Based on the case scenario above, determine: (a) The payback period of the project. (b) The profitability index of the project (c) The internal rate of return (IRR) of the project (d) The net present value (NPV) of the project 3. How sensitive is the NPV to changes in the price of new PDA? (Note: Assume the price of new PDA is RM290) 4. How sensitive is the NPV to changes in the quantity sold? (Note: Assume the unit sold increase by 120 units per year). 5. Should FIX & PLAY Electronics produce the new PDA? 6. Suppose FIX & PLAY Electronics loses sales on other models because of the introduction of the new model. How would this affect your analysis