Question 3 (Rubrie) Crystal Electronics is a mid-siped electronics manufacturer located in Johannesburg. When it started 70 years ago, the company repaired radios and other household appliances. Over the years, it expanded into manufacturing and is now a reputable manufacturer of various electronic items. One of the major revenue-producing items manufactured by Cryatal is a personal digital assistant (PDA). Crystal currently has one model on the market, and sales have been excellent. It was a unique isem that came in a vaciety of tropical colours and was pre-programmed to play. Hetwever, as with any electronic item, technologr changes rapidy. and the current PDA has limited features compared to newer models. Crystal spent R7 500000 to develop a prototype for a new model and a further R2 000000 for a marketing study to determine the expected sales figures for the new model. The variable costs per unit are expected to be 885 each. Fised costs for the eperation are estimated to run R3 million per vear. The estimated sales volumes for the next five years are 70000,80000,100000,85000 and 75000 respectively. The selling price of the new model aill be 7250 . The necessary plant and equipment can be purchased for k15 million and will be depreciated on a three-vear 5030:20 schedule. It is believed the value of the equipment at the end of five years will be R3 million. Net working capital for the new PDAs will be 20 per cent of sales. The timing of the net working capital requirements is expected to be as follows: there will be no initial outlay, but the changes in net working capital will first occur in Year 1 in line with the firt wear's sales. Q The indecendert inathule of fducatien (hel tae a22) Pase 7 at 11 Fhethitit1 The current model is expected to sell 80000 and 60000 units over the next two vears at a selling price of R240. After that, the production of the model will be terminated. Its variable costs are R.68 per unit, and the fixed costs are R1 800000 per year. If Crystal does introduce the new PDA, sales of the existing model will fall by 15 ooo units per year over the next two vears, and their selline price will have to be lowered to R220 each. Crystal has a 29 per cent corporate tax rate and a 12 per cent required return. The CEO has asked you, a graduate recently hired by the company's finance department, to prepare a regort that answers the following questions: Q,3.1 Calculate the payback period of the project. Q.3.2 Cakculate the profitability index of the project. Q.3.3 Calculate the NPY and IRR of the project and comment it the project should be approved
