Stankus-Wolf Electronics spent $1.3 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 $275,000 for a marketing study to determine the expected sales figures for the new smartphone. Stankus-Wolf Electronics can manufacture the new smartphone for $215 each in variable costs. Fixed costs for the operation are estimated to run $5.5 million per year. The estimated sales volumes are 68,000, 108,000, 89,000, 82,000, and 59,000 per year for each of the next five years, respectively. The unit price of the new smartphone will be $600. The necessary equipment can be purchased for $39.6 million and will be depreciated on a seven-year MACRS schedule. It is believed the value of the equipment in five years will be $6.0 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 23 percent corporate tax rate and a required return of 12 percent.

USE EXCEL FORMULA FUNCTIONS & SOLVE:

5. How sensitive is the NPV to changes in the price of the new smartphone? Assume a sales price of $610 for your analysis.
							Year 1	Year 2	Year 3	Year 4	Year 5
Sales
VC
Fixed costs
Depreciation
EBT
Tax
NI
+ Depreciation
Operating Cash Flow
Beginning NWC
Ending NWC
NWC Cash Flow
Net CF for sale of equipment
Cash Flows for Project:
Time
0
1
2
3
4
5
NPV with $610 sales price:
Sensitivity of changes in price: