Neemaia Leslie is an electronics manufacturer in Oceania. The company originally repaired radio telephones when it was founded more than 60 years ago. Over the years, the company has expanded, and it is now a reputable manufacturer of wireless and mobile telephones.

One of the major revenue producing items manufactured by the company is a smart phone. They currently have 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 colours and is pre-programmed to pay music. However as with any electronic item, technology changes rapidly. Company has spent sometime developing a prototype for a new smart phone. The company has spent sometimes too carrying out a marketing study to determine the expected sales figures for the new smart phone. Variable costs are estimated at $205 per unit and fixed costs for the operation are expected to run at $5.1million per year. The unit price of the new smart phone will be $465.

Estimated out over the next 5 years is as follows:

Year 1 Output = 60,000 Year 2 Output = 105,000 Year 3 Output = 82,000 Year 4 Output = 74,000 Year 5 Output = 58,000

The necessary manufacturing equipment can be purchased for $34.5 million and will depreciated for tax purposes over a five-year life (Straight line to zero) . IT is believed the value of the manufacturing equipment in five years time will be $2.5 million. the company has enough cash to invest in the project.

Networking capital for the smart phones will be 20% of sales and will have to purchased at the end of the year. The cost of the raw materials is reflected in the variable unit cost. Changes in Networking Capital will first occur at the end of Year 1 based on the first year's sales.

Company has 30% corporate tax rate and a 15% required rate of return.

(1) What is the payback period of the project?

(2) What is the profitability index of the project?

(3) What is the IRR of the project?

(4) What is the NPV of the project?

(5) Should the company proceed with the production of the new phone?

(6) Suppose the company loses sales on other models because of the introduction of the new model. How would this affect the analysis?

Note to Tutor : Please provide manual answers for IRR and not through excel formulas. Need to understand for an exam prep.