XYZ Limited is a manufacturer of electronic products. One of the major revenue producing items manufactured by XYZ is a smartphone. This is a unique item with variety of features. However, as with any electronic item, technology changes rapidly. The current smartphone has limited features in comparison with newer models. XYZ limited has spent $800,000 developing a prototype for a new smartphone that has all features of the existing one and includes additional new features. The company spent further $200,000 for marketing study to determine the expected sales for the new smartphone. The production manager has produced estimates of the costs associated with manufacture of the new smartphone. Variable costs are estimated at $210 per unit and fixed costs for the operation are expected to run at $5.3 million per year. The estimated sales volume is 64,000 units in Year 1; 106,000 units in Year 2; 87,000 units in Year 3; 78,000 units in Year 4; and 54,000 units in the final year. The unit price will be $515. The necessary manufacturing equipment can be purchased for $38.5 million and will be depreciated for tax purposes over a seven-year life (straight line to zero). It is believed the value of manufacturing equipment in five years time will be $5.8 million. The initial working capital required would be 20% of Year 1 sales. This net working capital will be recouped at the end of the project life. The production manager, however, contends that the release of new smartphone would affect the sales of existing smartphone. The reduction in sales of existing smartphone is expected to be equivalent to reduction in sales of new smartphone by 20% every year. The companys after-tax cost of capital is 12% per annum. Assume that the company is subject to 30% corporate tax and that the tax is paid at end of the same year. Prepare cash flow tables (which incorporates taxes and includes initial investment, operating, and terminal cash flows) to examine whether the company should produce the new smart phone. Compute net present value (NPV), payback period and internal rate of return to decide whether the company should produce the new smart phone Conduct a sensitivity analysis of NPVs to change in the unit price of the new smart phone. Assume the unit price of the phone can deviate to $505 and $525 [Hint: Provide the answers to this question even if you decide to reject the project.] ii) Conduct a sensitivity analysis of NPVs to change in the quantity sold. Assume the quantity sold can deviate by 10%.

Please address what should i do with 20% sales reduction every year point