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Stankus-Wolf Electronics is a midsized electronics manufacturer located in Tampa, Florida. The company president is Alison Lyons, who inherited the company. The company originally repaired radios and other household appliances when it was founded more than 70 years ago. Over the years, the company has expanded, and it is now a reputable manufacturer of various speciality electronic items. Derek Rigsby, a recent MBA graduate, has been hired by the company in its finance department.

One of the major revenue-producing items manufactured by Stankus-Wolf Electronics is a smartphone. Stankus-Wolf Electronics currently has one smartphone model on the market and sales have been excellent. The smartphone is a unique item in that it comes in a variety of tropical colors and is preprogrammed to play Jimmy Buffet music. However, as with any electronic item, technology changes rapidly, and the current smartphone has limited features in comparison with newer models. Stankus-Wolf Electronics spent $1.2 million to develop a prototype for a new smartphone that has all the features of the existing one but adds new features such as Wifi tethering. The company also spent $250,000 for a marketing study to determine the expected sales figures for the new smartphone.

Stankus-Wolf Electronics can manufacture the new smartphone for $210 each in variable costs. Fixed costs for the operation are estimated to run $5.3 million per year. The estimated sales volumes are 64,000, 106,000, 87,000, 78,000, and 54, 000 per year for each of the next five years, respectively. The unit price of the new smartphone will be $515. The necessary equipment can be purchased for $38.5 million and will be depreciated on a seven-year MACRS schedule. It is believed the value of the equipment in five years will be $5.8 million.

Net working capital (NWC) for the smartphone will be 20 percent of sales and will occur with the timing of the cash flows for the year (i.e. there is no initial outlay for the NWC). Changes in NWC thus will occur in Year 1 with the first years sales. Stankus-Wolf Electronics has a 22 percent corporate tax rate and a required return of 12 percent.

Alison has asked Derek to prepare a report that answers the following questions:

1. What is the payback period of the project?

2. What is the profitability index of the project?

3. What is the IRR of the project?

4. What is the NPV of the project?

5. How sensitive is the NPV to changes in the price of the new smartphone?

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

7. Should Stankus-Wolf Electronics produce the new smartphone?

8. Suppose Stankus-Wolf Electronics loses sales on other models because of the introduction of the new model. How would this affect your analysis?

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Question 7 & 8

B E F Year 3 Year 4 Year 5 1 A. Calculate the Sales Forecast for this project: 2 Year 1 Year 2 3 Estimated units sold 4 Sales price 5 Total Sales 6 7 8 B. Cash Flow Today: 9 Equipment 10 NWC 11 Total 12 A B D E F C. Calculate the Operating Cash Flows for years 1 to 5 1 2. 3 Year 2 Year 3 Year 4 Year 5 Year 1 4 Sales 5 VC 6 Fixed costs 7 Depreciation 8 EBT 9 Tax 10 NI 11 + Depreciation 12 Operating Cash Flow 13 14 15 Depreciation Calculation: 16 Rate 17 Yr 1 14.29% 18 Yr 2 24.49% 19 Yr 3 17.49% 20 Yr 4 12.49% 21 Yr 5 8.93% 22 Yr 6 8.92% 23 Yr 7 8.93% 24 Yr 8 4.46% 25 100.00% 26 27 per IRS table A-1 Depreciation D m F 2 Year 3 Year 4 Year 5 B 1 D. Calculate the Net Working Capital Cash Flow Year 1 Year 2 3 Beginning NWC 4 Ending NWC 5 NWC Cash Flow 6 7 At end of 5 years: 8 Market value of equipment: 9 Book value of equipment: 10 Gain/(Loss) on equipment: 11 Taxes on sale 12 After-tax salvage value: 13 Net cash flow for sale of equipment: 14 D A B 1 E. Calculate the net cash flows for years 0 through 5 2 Time Cash Flow 3 ol 4 1 2 5 6 3 4 7 8 5 9 10 Answer #1 - 4 Calculate the following: 11 1. Payback Period = 12 2. Profitability Index = 13 3. IRR = 14 4. NPV = 15 B F E 1 5. How sensitive is the NPV to changes in the price of the new smartphone? Assume a sales price of 2 $525 for your analysis. 3 4 Year 1 Year 2 Year 3 Year 4 Year 5 5 Sales 6 VC 7 Fixed costs 8 Depreciation 9 EBT 10 Tax 11 NI 12 + Depreciation 13 Operating Cash Flow 14 15 Beginning NWC 16 Ending NWC 17 NWC Cash Flow 18 19 Net CF for sale of equipment 20 21 Cash Flows for Project: 22 Time 23 0 24 1 25 2 26 3 27 4 28 5 29 30 NPV with $525 sales price: 31 Sensitivity of changes in price: 32 33 34 35 36 F B D E 1 6. How sensitive is the NPV to changes in the quantity sold? Assume an increase of 100 units per year 2 for your analysis. 3 4 Year 1 Year 2 Year 3 Year 4 Year 5 5 Sales 6 VC 7 Fixed costs 8 Depreciation 9 EBT 10 Tax 11 NI 12 + Depreciation 13 Operating Cash Flow 14 15 Beginning NWC 16 Ending NWC 17 NWC Cash Flow 18 19 Net CF for sale of equipment 20 21 Cash Flows for Project: 22 Time 23 0 24 NA 25 26 3 27 4 28 5 29 30 NPV with additional 100 units/yr 31 Sensitivity of changes in price: 32 33 A B E F 1 7. Should Stankus-Wolf Electronics produce the new smartphone? 2 3 4 5 6 78. Suppose Stankus-Wolf Electronics loses sales on other models 8 because of the introduction of the new model. How would this 9 affect your analysis? 10 11 12 13 14 15 B E F Year 3 Year 4 Year 5 1 A. Calculate the Sales Forecast for this project: 2 Year 1 Year 2 3 Estimated units sold 4 Sales price 5 Total Sales 6 7 8 B. Cash Flow Today: 9 Equipment 10 NWC 11 Total 12 A B D E F C. Calculate the Operating Cash Flows for years 1 to 5 1 2. 3 Year 2 Year 3 Year 4 Year 5 Year 1 4 Sales 5 VC 6 Fixed costs 7 Depreciation 8 EBT 9 Tax 10 NI 11 + Depreciation 12 Operating Cash Flow 13 14 15 Depreciation Calculation: 16 Rate 17 Yr 1 14.29% 18 Yr 2 24.49% 19 Yr 3 17.49% 20 Yr 4 12.49% 21 Yr 5 8.93% 22 Yr 6 8.92% 23 Yr 7 8.93% 24 Yr 8 4.46% 25 100.00% 26 27 per IRS table A-1 Depreciation D m F 2 Year 3 Year 4 Year 5 B 1 D. Calculate the Net Working Capital Cash Flow Year 1 Year 2 3 Beginning NWC 4 Ending NWC 5 NWC Cash Flow 6 7 At end of 5 years: 8 Market value of equipment: 9 Book value of equipment: 10 Gain/(Loss) on equipment: 11 Taxes on sale 12 After-tax salvage value: 13 Net cash flow for sale of equipment: 14 D A B 1 E. Calculate the net cash flows for years 0 through 5 2 Time Cash Flow 3 ol 4 1 2 5 6 3 4 7 8 5 9 10 Answer #1 - 4 Calculate the following: 11 1. Payback Period = 12 2. Profitability Index = 13 3. IRR = 14 4. NPV = 15 B F E 1 5. How sensitive is the NPV to changes in the price of the new smartphone? Assume a sales price of 2 $525 for your analysis. 3 4 Year 1 Year 2 Year 3 Year 4 Year 5 5 Sales 6 VC 7 Fixed costs 8 Depreciation 9 EBT 10 Tax 11 NI 12 + Depreciation 13 Operating Cash Flow 14 15 Beginning NWC 16 Ending NWC 17 NWC Cash Flow 18 19 Net CF for sale of equipment 20 21 Cash Flows for Project: 22 Time 23 0 24 1 25 2 26 3 27 4 28 5 29 30 NPV with $525 sales price: 31 Sensitivity of changes in price: 32 33 34 35 36 F B D E 1 6. How sensitive is the NPV to changes in the quantity sold? Assume an increase of 100 units per year 2 for your analysis. 3 4 Year 1 Year 2 Year 3 Year 4 Year 5 5 Sales 6 VC 7 Fixed costs 8 Depreciation 9 EBT 10 Tax 11 NI 12 + Depreciation 13 Operating Cash Flow 14 15 Beginning NWC 16 Ending NWC 17 NWC Cash Flow 18 19 Net CF for sale of equipment 20 21 Cash Flows for Project: 22 Time 23 0 24 NA 25 26 3 27 4 28 5 29 30 NPV with additional 100 units/yr 31 Sensitivity of changes in price: 32 33 A B E F 1 7. Should Stankus-Wolf Electronics produce the new smartphone? 2 3 4 5 6 78. Suppose Stankus-Wolf Electronics loses sales on other models 8 because of the introduction of the new model. How would this 9 affect your analysis? 10 11 12 13 14 15