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Posted: January 28th, 2023
president isNopparatKongsun, who inherited the company. When it was
founded over 70 years ago, the company originally repaired radios and other household
appliances. Over the years, the company expanded into manufacturing and is now
a reputable manufacturer of various electronic items.TanakitDamcho, a recent MBA graduate, has been hired by the
company’s finance department.
One of the major revenue-producing items
manufactured by SCI is a smart phone. SCI currently has one smart phone model
on the market, and sales have been excellent. However, as with any electronic
item, technology changes rapidly, and the current smart phone has limited features
in comparison with newer models. SCI spent 22.5 millionbahtto develop a prototype for a new smart phone
that has all the features of the existing smart phone but adds new features
such asWiFitethering. The company has spent a further 6
millionbahtfor a marketing study to determine the
expected sales figures for the new smart phone.
SCI can manufacture the new smart phones for
6,450bahteach in variable costs. Fixed costs for the
operation are estimated to run 183 millionbahtper year. The estimated sales volume is
153,000, 167,000, 124,000, 96,000, and 77,000 per year for the next five years,
respectively. The unit price of the new smart phone will be 15,600baht. The necessary equipment can be purchased for
1,215 millionbahtand will be depreciated on a seven-year MACRS
schedule. It is believed the value of the equipment in five years will be 183
millionbaht.
As previously stated, SCI currently
manufactures a smart phone. Production of the existing model is expected to be
terminated in two years. If Conch Republic does not introduce the new smart
phone, sales will be 95,000 units and 65,000 units for the next two years,
respectively. The price of the existing smart phone is 11,400 per unit, with
variable costs of 4,350bahteach and fixed costs of 129 millionbahtper year. If SCI does introduce the new smart
phone, sales of the existing smart phone will fall by 30,000 units per year,
and the price of the existing units will have to be lowered to 6,300bahteach. Net working capital for the smart phones
will be 21 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. SCI has a 20
percent corporate tax rate and a required return of 12 percent.
Nopparathas askedTanakitto prepare a report in Excel that answers the
following questions.
What is the payback period of the project?
What is the profitability index of the
project?
What is the IRR of the project?
What is the NPV of the project?
Nopparat, the owner of SCI, had received the capital
budgeting analysis fromTanakitfor the new smart phone the company is
considering.Nopparatwas pleased with the results, but he still had
concerns about the new smart phone. SCI had used a small market research firm
for the past 20 years, but recently the founder of that firm retired. Because
of this, he was not convinced the sales projections presented by the market
research firm were entirely accurate. Additionally, because of rapid changes in
technology, he was concerned that a competitor could enter the market. This
would likely force SCI to lower the sales price of its new smart phone. For
these reasons, he has askedTanakitto analyze how changes in the price of the new
smart phone and changes in the quantity sold will affect the NPV of the
project.
Nopparathas askedTanakitto prepare a report in Excel answering
the following questions.
How sensitive is the NPV to
changes in the price of the new smart phone?
How sensitive is the NPV to
changes in the quantity sold of the new smart phone?
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