Question
Orange Inc is debating if they should launch a new version of their tablet - the Clementine 5. It contains a faster processor, more memory,
Orange Inc is debating if they should launch a new version of their tablet - the Clementine 5. It contains a faster processor, more memory, and a bigger screen than their current tablet line (Clementine 4). This product launch is important to remain the market share leader in the tablet segment @ 40%. The selling price for the Clementine 5 is going to be 10% higher, and due to lower cost to manufacturer the new tablet, contribution margin improved to 71.8% until 2019. However, due to comsumer preferances changing rapidly, the company forecasts a price reduction of the Clementine 5 by 10% in 2020 and 2021 as the demand shifts to newer technologies. Orange expects the sales volume of Clementine 5 to be 10% higher than the Clementine 4 at 2 million in 2017, then experience a 12% year-over-year increase for the next 3 years to 2019. Sales for the Clementine 5 will remain flat in 2020 and 2021. The Clementine 4 will continue to see a rapidly declining sales volume of 10% until 2018 and a 15% decline year-over-year (Y/Y) until 2021. Once the company releases the new tablet in 2017, the company is going to reduce the price of Clementine 4 20% to $300, which will decrease the contribution margin to 50%. The total investment for the launch of the Clementine 5 is $550M. Assume yearly fixed costs for Orange at $200M/year, salvage value for their investment is $75M, a corporate tax rate of 35%, NWC of 20%, straight-line depreciation over 5 years, and a discount rate of 12%. Due to the short product lifecycles of the consumer tablet market, Orange quantifies their business cases over a 5 year period. Should Orange launch the Clemetine 5...why?
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