roject 1 :Smartwatch ZT3000

The business case team had compiled the following baseline information surrounding the Smartwatch ZT 3000 project:

1. The life of the Smartwatch ZT 3000 project was expected to be six years. Assume the analysis took place at the end of 2022.

2. The suggested retail price of the smartwatch was RM250. Gross margins for high-end wearables averaged about 40% at the retail level, meaning each watch sold would net Nekia Corporation RM150.

3. The global wearables market in 2021 totalled approximately RM74.5 billion and was expected to grow at 1.8% from 2021 to 2028, reaching RM84.4 billion by 2028. Based on market research and analysis of other recent athlete endorsements, the Nekia Corporation marketing division estimated the following sales volumes for Smartwatch ZT 3000:

Year	2023	2024	2025	2026	2027	2028
Number Sold(milliions	1.1	2.0	1.3	`1.4	1.5	1.0

4. The 2024 number assumed Lee Zii Jia participated in the 2024 games in Paris and won at

least one medal.

5. For the first two years, the introduction of Smartwatch ZT 3000 would reduce sales of

existing Nekia Corporation phone as follows:

a. Lost sales: 2023: RM38 million 2024: RM17 million

b. Assume the lost revenue had the same margins as Smartwatch ZT 3000.

6. In order to produce the smartwatch, the firm needed to build a new factory in Batu

Kawan. This required an immediate outlay of RM155 million, to be depreciated at 10%

per annum using straight line method. The firms analysts estimated the building would

be sold for RM22 million at project termination.

7. The company must immediately purchase equipment costing RM18 million. Freight and

installation of the equipment would cost RM6 million. The cost of equipment

and freight/installation was to be depreciated at 15% per annum using straight line

method It was believed the equipment could be sold for RM3 million upon project

termination.

8. Fixed assets can claim capital allowance on a 25% reducing balance basis. A balancing

allowance is claimed in the final year of operation.

9. In order to manufacture Smartwatch ZT 3000, two of the firms working capital accounts

were expected to increase immediately. Approximately RM15 millions of inventory

would be needed quickly to fill the supply chain. In year 2025, the working capital

needed would be RM17 million. All working capital would be recovered at the end of the

project by the end of the sixth year.

10. Variable costs were expected to be 60% of revenue.

11. Selling, general, and administrative expenses were expected to be RM8 million per year.

12. Lee Zii Jia would be paid RM3 million per year for his endorsement of Smartwatch ZT

3000, with an additional RM1 million Olympic bonus in 2024.

Other advertising and promotion costs were estimated as follows

Year	2023	2024	2025	2026	2027	2028
A&P Expense (millions)	RM 26	RM 19	RM15	RM20	RM18	RM14

13. Nekia Corporation had already spent RM2 million in research and development on

Smartwatch ZT 3000.

14. The Smartwatch ZT 3000 project was to be financed using a combination of equity and

debt. The interest costs on the debt were expected to be approximately RM1.2 million per

year. The Nekia Corporation discount rate for new projects such as this was 11%.

15. Nekia Corporations effective tax rate was 24%. The tax is payable one year in arrears.

Project 1: Smartwatch ZT 3000

1. Which cash flows should be incorporated into the projects forecast? Why or why not?

2. Does Smartwatch ZT 3000 appear attractive from a quantitative standpoint? To answer

this question, estimate the projects payback, net present value, and internal rate of return.

3. Suggest strategic factors that should be considered before Nekia undertake the project.