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Unlimited
Group members: Farida Asgarova, Hasan
Rzayev,
a) In this section, we will discuss future sales, profits, and cash flows of the new product throughout
its five-year life cycle:
Information given:
Sales: $10 million, $13 million, $13 million, $8.667 million, $4.333 million in respective years
Cost of sales: 60% of sales per year
SGA Expenses: 23.5% of the sales
Tax Rate: 40%
NWC: 27% of sales
Cost of Equipment: $500,000 (5-year straight-line based depreciation)
Introductory Expense: $200, 000
Sunk cost: $1.0 million
Years:
Sales:
COS
SGA exp.
Deprec.
Intro exp.
EBIT
1
10,000,000
-6,000,000
-2,350,000
-100,000
- 200,000
1,350,000
2
13,000,000,
-7,800,000
-3,055,000
-100,000
2,045,000
2,045,000
1,330,055
614,945
Taxes
540,000
818,000
818,000
532,022
245,978
Net income
810,000
1,227,000
1,227,000
798,033
Oper.cash f.
910,000
1,327,000
3
4
13,000,000 8,667,000
-7,800,000 -5,200,200
-3,055,000 -2,036,745
-100,000
-100,000
1,327,000
898,033
5
4,333,000
-2,599,800
-1,018,255
-100,000
368,967
468,967
Working c.
2,700,000
3,510,000
-810,000
Equipment
-500,000
Total flows
-3,200,000
100,000
3,510,000
2,340,090
1,169,910
1,169,910
1,170,180
1,169,910
1,327,000
2,496,910
2,068,213
1,638,877
Highlighted parts of table show sales, net income, and cash flows generated by the product.
b) In this section we are proceeding the discussion on NPV and IRR analysis.
Projected cash flows are as follows:
1
100,000
2
1,327,000
3
2,496,910
4
2,068,213
5
1,638,877
NPV:-3,200,000+100,000/1.2+1,327,000/1.22+2,496,910/1.23+2,068,213/1.24+1,638,877/1.25=905,862
To find IRR we have:-3,200,000+100,000/(1+IRR)+1,327,000/(1+IRR)2+2,496,910/(1+IRR)3+2,068,213/
(1+IRR)4+1,638,877/(1+IRR)5=0:
IRR=29.55%
c) After doing all the analysis question arises: Should the company introduce the product? Yes,
Electronics Unlimited should introduce the product. Why? Because the NPV of the project is
positive and the IRR is greater than the required return. This means the product will provide the
company with future profits.