Shortly after the release of the first iPhone in 2007, Verizon asked Blackberry to create a touchscreen "iPhone killer". Mr. Lazaridis, the co-founder and former CEO of Blackberry opposed the launch plan for the touchscreen z10 and argued strongly in favour of emphasising keyboard devices. But the current CEO, Mr.

Heins, did not take his advice and launched the z10, with disastrous results.

Read through the case study of Blackberry and answer the following questions:

• What are the key costs and benefits of the z10 project?
• What is the value of this opportunity if the discount rate that matches the risk of the cash flows from the z10 project is 10%? (start by finding out how much money they'd make with z10 and compare this to a 10% discount rate value using their expenses to see which has greater return)
• Based off this, should Blackberry launch the z10?

not follow his advice and launched the touchscreen z10, with disastrous results. The Blackberry z10 Project 1 To decide whether to proceed with the z10 project, Blackberry Ltd. collaborated with a market research company, which conducted a $500,000 feasibility study. This study produced the following forecasts. Sales Revenue Projections The target market for the new z10 is business professionals and high-income individuals for whom price is not a primary consideration. BlackBerry Ltd. expects a retail launch price of $199.99 per handset and a wholesale price of $180 per handset. The market study suggests that initial sales are expected to be 1.75 million units the first year. As with all mobile phones, sales are expected to be highest in the first year. In subsequent years, sales volumes will decline, and price discounts will reduce the average selling price. In particular, for the z10, sales volumes are expected to decrease by 25% in the second year and by an additional 33% in the third year. Sales in year 4 will represent closeouts early in the year of all remaining inventory. Average selling prices are expected to decline by $20 per handset each year. BlackBerry Ltd. believes that the introduction of this new product will lead to additional price pressure on BlackBerry's keyboard-equipped mobile phones. Revenues from BlackBerry's existing phones are expected to be $200 million for next year if neither the z10 nor comparable new offerings are introduced to the market. The launch of the z10 will lead to an average discount on existing products of 20% in order to maintain their projected sales volume. If the z10 project does not go through, Verizon will turn to Motorola to produce a similar product which will erode 10% of the revenues from Blackberry's existing phones in the first year anyway. There will be no such impact in subsequent years as the existing devices will be phased out anyway. Manufacturing Cost Projections QNX Software, a cutting-edge software maker that was recently acquired by Blackberry Ltd., would provide the building blocks for the new BlackBerry 10 operating system. Total design, engineering, and R\&D costs are expected to be $110 million. Once in production, manufacturing costs are expected to be $70 per handset. For production purposes, new molds must be created for the z10 devices. Total upfront cost for a new injection-molding machine is $50 million. This machine will be depreciated using a straight-line depreciation method over its fouryear useful life. Based on past experience, Blackberry believes that it can sell the machine for $20 million at the end of year 3 . Operating Expenses Projections Blackberry Ltd. plans to spend $50 million on a marketing campaign prior to the official launch of the z10. Once the new phones are on the market, selling, general, and administrative expenses are expected to be 10% of annual sales revenues. Net Working Capital Projections Blackberry Ltd. plans to build 1 million handsets prior to the initial product launch. Production in years 1 through 3 will then be set to match demand and provide for initial inventory equal to 50% of the next year's anticipated sales, plus a 25% buffer to prevent stockouts due to demand uncertainty. Inventory units in year 3 will be 25% of contemporaneous units sold. All remaining inventory will be sold in year 4 . Blackberry's customers will demand standard terms on these products, and so accounts receivable are expected to remain outstanding for an average of 90 days. Incremental profits from the sales of these phones are subject to a 40% marginal corporate tax rate. 1 The figures in this section have been adjusted to best serve as the basis for class discussion