Telstar can manufacture the new smart phone for $185 each in variable costs. Fixed costs for the

operation are estimated to run 5.3 million per year. The estimated sales volume is 74,000, 95,000,

125,000, 105,000, and 80,000 per each year for the next five years, respectively. The unit price of the

new smart phone will be $480. 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 5 years will be

$5.4 million.

As previously stated, Telstar currently manufactures a smart phone. Production of the existing model is

expected to be terminated in two years. If Telstar does not introduce the new smart phone, sales will be

80,000 units and 60,000 units for the next two years, respectively. The price of the existing smart phone

is $310 per unit, with variable costs of $125 each and fixed costs of $1,800,000 per year. If Telstar does

introduce the new smart phone, sales of the existing smart phone will fall by 15,000 units per year, and

the price of the existing unit will have to be lowered to $275 each. New working capital for the smart

phone s will be 20 percent of sales and will occur with the timing of the cash flows for the year: for

example there is no initial outlay for NWC, but changes in NWC will first occur in year 1 with the first

year's sales. Telstar has a 35 percent corporate tax rate and a 12 percent required return.

Blair has asked Jay 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?