Question 1 - 6

REQUIREMENT:

All the answers have to be in type written. All the relevant workings need to show for the quantitative questions. Any needed diagram or graph need to be indicated as well.

FIX & PLAY Electronics

FIX & PLAY Electronics is a midsized electronics manufacturer located in Johor Baharu, Malaysia. The company Chief Executive Officer (CEO) is Mark Paul, who inherited the company. When it was founded over50 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. Andrew 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 RM775,000 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 RM225,000 for a marketing study to determine the expected sales figures for the new PDA.

FIX & PLAY can manufacture the new PDA for RM95 each in variable costs. Fixed costs for the operation are estimated to run RM3.2 million per year. The estimated sales volume is RM68,000, RM79,000, RM105,000, RM83,000, and RM64,000 per each year for the next five years, respectively. The unit price of the new PDA will be RM275. 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 20% 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 1 with the first year*s sales. FIX & PLAY Electronics has a 35percent corporate tax rate and a 12 percent required return.

Mark Paul has asked Andrew Chan to prepare report that answers the following questions:

Table 1- Modified Accelerated Cost Recovery System (MACRS)

Recovery Year

3-Year

5-Year

7-Year

1

33.33

20.00

14.29

2

44.45

32.00

24.49

3

14.81

19.20

17.49

4

7.41

11.52

12.49

5

11.52

8.93

6

5.76

8.92

7

8.93

8

4.46

Questions:

1. Discuss various techniques of capital budgeting as well as its advantages and disadvantages.

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?

4. How sensitive is the NPV to changes in the quantity sold?

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?