MT 217 Electronics is a midsized electronics manufacturer located in Melbourne, Florida. The company president is Sherry Jones. 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. Doug Brown has been hired by the company's finance department.

One of the major revenue-producing items manufactured by MT 217 is a personal digital assistant (PDA). MT 217 currently has one PDA model on the market, and sales have been excellent. The PDA is a unique item in that it comes in a variety of tropical colors and is preprogrammed to play Jimmy Buffett music. However, as with any electronic item, technology changes rapidly, and the current PDA has limited features in comparison with newer models. MT 217 developed a prototype for a new PDA that has all the features of the existing PDA but adds new features such as cell phone capability. The company has performed a marketing study to determine the expected sales figures for the new PDA.

MT 217 can manufacture the new PDA for $200 each in variable costs. Fixed costs for the operation are estimated to run $4.5 million per year. The estimated sales volume is 70,000, 80,000, 100,000, 85,000, and 75,000 per each year for the next five years, respectively. The unit price of the new PDA will be $340. The necessary equipment can be purchased for $16.5 million and will be depreciated on a 5 year straight-line schedule.

Net working capital investment for the PDAs will be $6,000,000 this year. Of course NWC will be recovered at the projects end. MT 217 has a 35 percent corporate tax rate.

MT 217 's capital structure is 40% debt with an after-tax cost of 8% and 60% equity costing 16%,

Sherry has asked Doug to prepare a report that answers the following questions:

What is MT 217 's WACC, which will be used as the required rate of return for this project?
What is the IRR of the project?
What is the NPV of the project, based on the WACC (required rate of return)?
If you were Doug, how would you answer the questions?

Unit 8 Excel Spreadsheet (no formulas)

Step1: Calculation of cash Flows

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Sales(in Units) 70,000 80,000 100,000 85,000 75,000
Sales(in Dollar) 23,800,000 27,200,000 34,000,000 28,900,000 25,500,000
Less: Variable Cost 14,000,000 16,000,000 20,000,000 17,000,000 15,000,000
Fixed Costs (4,500,000) (4,500,000) (4,500,000) (4,500,000) (4,500,000)
Less: Depreciation 3,300,000 3,300,000 3,300,000 3,300,000 3,300,000
Earning Before Tax 2,000,000 3,400,000 6,200,000 4,100,000 2,700,000
Less: Taxes 700,000 1,190,000 2,170,000 1,435,000 945,000
Earning After Tax 1,300,000 2,210,000 4,030,000 2,665,000 1,755,000
Add: Depreciation 3,300,000 3,300,000 3,300,000 3,300,000 3,300,000
Cash Flow from Operations 4,600,000 5,510,000 7,330,000 5,965,000 5,055,000

Initial Investment -$16,500,000
Investment in Working Capital -$6,000,000
$4,600,000 5,510,000 7,330,000 5,965,000 5,055,000
Net Cash Flow

1. What is the IRR of the project?

Year Cash Flow
0 $(6,000,000) Capital source weights after tax cost WACC
1 $4,600,000 debt 0.4 0.08 0.032
2 $5,510,000 common stock 0.6 0.16 0.096
3 $7,330,000 0.128
4 $5,965,000
5 $5,055,000
i
IRR 84.95%


2. What is the NPV of the project, based on the required rate of return of 12%?
PV Factor @12%
Year Cash Flow 1 Present Value $12,383,083.20
0 $(6,000,000) (6,000,000.00)
1 $4,600,000
2 $5,510,000 -
3 $7,330,000 -
4 $5,965,000 -
5 $5,055,000 -
NPV $12,383,083.20

Attached is the answer worked into excel spreadsheet in case the above answer is too confusing hope this helps

Attached Files

emilyneeley_unit8_Challenge.xls (32.5 KB, 237 views)