Electronics produce the new satellite radio receiver

Assignment Help Financial Management

Reference no: EM131909393

ABC Electronics is a midsized electronics manufacturer located in Wilmington, Delaware. One of the major revenue-producing items manufactured by ABC Electronics is a satellite radio receiver. ABC Electronics currently has one model on the market and sales have been excellent. The existing product has limited capabilities in that it is uniquely tied to a single vendor of satellite radio programming services. However, as with any electronic item, technology changes rapidly, and the single source limits the product’s available market. ABC Electronics spent $750,000 to develop a prototype for a new smartphone that has all the features of the existing one but adds several new features and can accept programed music from a variety of sources. The company has spent a further $200,000 for a marketing study to determine the expected sales figures for the new receiver.

ABC Electronics can manufacture the new receiver for $215 each in variable costs. Fixed costs for the operation are estimated to run $5.1 million per year. The estimated sales volume is 64,000, 106,000, 87,000, 80,000, and 56,000 per year for the next five years, respectively. The unit price of the new receiver will be $495. The new equipment required to produce the receiver would cost $34.5 million and be depreciated on a seven-year MACRS schedule. It is believed the value of the equipment in five years will be $5.5 million.

Net working capital for the satellite radio receiver will be 25 percent of sales and will occur with the timing of the cash flows for the year (i.e., there is no initial outlay for NWC). Changes in NWC will thus first occur in Year 1 with the first year's sales. ABC Electronics has a 30 percent corporate tax rate and a required return of 10 percent.

George, the owner of ABC Electronics needs your help to prepare a report that answers the following question:

QUESTION:

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. Should ABC Electronics produce the new satellite radio receiver? Suppose ABC Electronics loses sales on other models because of the introduction of the new model. How would this affect your analysis?

Reference no: EM131909393

Questions Cloud

Think about your future role in public policy : Think about your future role in public policy and the ways in which you might effect positive social change.

Think about a policy change you might propose : Think about which public policy area needs to be addressed or which public policy you feel is most important to change, and then propose a policy change.

Explain control domain and how it maps to your chosen scope : Explain the control domain, how it maps to your chosen scope, and specifically what your organization does to implement the stated control.

When does diversity not matter when working with clients : Explain the process for clients who refuse to pay for services after therapy. When does diversity not matter when working with clients?

Electronics produce the new satellite radio receiver : What is the payback period of the project? What is the profitability index of the project? Should ABC Electronics produce the new satellite radio receiver?

Calculate the Genworth NDI for the borrowers : Using the Excel or Online version of the Genworth Serviceability Calculator, calculate the Genworth NDI for the borrowers

Financial break-even points for wettway sailboat : Use the above expression to find cash, accounting and financial break-even points for Wettway Sailboat.

Steps are involved in the capital budgeting process : Capital Budgeting: What major steps are involved in the capital budgeting process?

Create pseudocode that describes necessary flow of program : Create pseudocode that describes the necessary flow of your program with respect to both creating a user account and placing an order.

User Account

All Pages