Commodore It is the beginning of 1982. Commodore International has decided to launch its new product: a personal computer called the Commodore 64 (C64). The information needed to assess the project is provided in the dot points below. The C64 will initially sell at $595. Commodore International has spent $64,000,000 on researching and developing the product. Demand for the C64 is forecast for fourteen years as follows: o For 1982 Commodore will sell 500,000 C64s. o For 1983 to 1986, Commodore will sell 2,000,000 C64s each year but at a slightly reduced price (see next point). o At the beginning of 1983, Commodore will reduce its selling price to $400 amidst fierce price competition between competitors. o For 1987 to 1991 Commodore will sell 800,000 units per year (at $400 per unit). o For 1992 to 1995 Commodore's sales will fall by 15 percent each year (the selling price remains at $400 per unit). That is, sales for 1992 are 15 percent lower than in 1991. Sales for 1993 are 15 percent lower than for 1992 and so on... o The project will be completed at the end of 1995. The C64 has an initial variable cost of $135 per unit. Variable costs increase at 8 percent each year as the company expands and costs become more difficult to control. The company will spend $10,000,000 each year on advertising the C64. Fixed costs are $60,000,000 for each year. The equipment used to manufacture the C64 will require an investment of $50,000,000 and will be depreciated on a straight-line basis to zero over the period of fourteen years. There will be no salvage value. Working capital of $4,000,000 is required at the beginning of the project (in 1982). Further injections of working capital are required as follows: o $2,000,000 in 1986 o $3,500,000 in 1990 o $2,500,000 in 1993 All working capital will be retumed in the final year of the project. The taxation rate is 30 percent. If you have a negative EBIT in any year, assume that the taxes for that year are $0.00. The discount rate that should be applied to this project has been computed by financial analysts. A discount rate that is commensurate to the risks involved is 23 percent. PREPARING YOUR ASSIGNMENT The answer for this assignment must be submitted in a single Excel file. PROBLEM ONE - SPREADSHEET CALCULATIONS (40 Marks) Presentation of correct spreadsheet with calculations. Note* part marks can be allocated even if your spreadsheet is incorrect. Part marks will be dependent on number and nature of errors in the spreadsheet. PROBLEM TWO (10 Marks) Based on your spreadsheet, calculate the NPV of the C64 project using the discount rate of 23 percent and briefly advise whether the project should be undertaken and justify your answer (i.e. state simply in one sentence whether the project should be accepted and the reasons for your decision). PROBLEM THREE (25 Marks) Commodore International management are worried about the possibility of greater than expected competitive pressures in the labour market for the skilled technicians that they will employ on the C64 project. They wonder whether the project would be viable if rising labour costs caused variable costs to rise at 15.50 percent (rather than 8 percent). Adjust the variable costs for the C64 and rework problem one. Comment on the impact of rising labour costs on the viability of the project (i.e. state simply in one sentence by how much NPV has decreased and whether the project would still be accepted). PROBLEM FOUR (25 Marks) Pricing strategy is an important consideration for every firm Assume that the product's elasticity the relationship between price and demand (yes, economics is critically important!) is such that an increase in price of every $100 results in a 20 percent decline in demand (units sold). Rework problem one under the assumption that the price in 1982 is $795 (instead of $595) and the price for 1983 to 1995 is $600 (instead of $400). Briefly comment on the impact of this pricing strategy on the viability of the project (e. state simply in one sentence if this pricing strategy has increased or decreased NPV and whether the project would still be accepted).