Acme Inc is a high tech firm residing in Santa Monica, California which specializes in the design, implementation, manufacture, and market distribution of a tablet computer called “Sorion.” Its main competitor is Apple Inc. which would initially seem suicidal in terms of a business plan and competition; however, the U.S. Justice Dept. has opened an antitrust case against Apple. As such, unbeknownst to anyone, Apple has decided it wants to help support Acme Inc financially and operationally to maintain a viable competitor and hence keep the antitrust cops off its back. Acme Inc has a mole in Apple’s operations who discovered Apple’s plans with respect to Acme Inc.
With this information (the most valuable commodity in the world) Acme Inc decided to incur $3,567,500 in research and development to bolster its new product called “Dpad” and make it generically compatible with its cloud based operating strategy for the next eight to ten years. In conjunction with this, Acme Inc decided to spend $2,213,700 to hire a market research firm named BDX and Associates. This market research firm conducted studies in 22 rapidly developing areas of the U.S and several similar areas in Canada, Latin America, and several countries in South America to determine the most likely future sales level in units and dollars that Acme Inc could expect to realize.
The cost of the equipment to develop the new Dpad is approximately $66,347,500 which will be depreciated on a five-year MACRS schedule. At the end of five years it is expected that the reasonable salvage value of the investment will be ten percent of its original cost. Acme Inc can manufacture the Dpad for which the variable cost per unit are expected to come in at $313 while overall fixed costs would be $8,795,000 per year. At this point BDX estimates that sales of the Dpad will be 111,000, 126,000, 147,000, 128,000, and 91,000 units respectively for the next five years with a sales price of $689 per unit.
Sales of the Sorion are expected to come in at 117,000, and 96,000 units respectively over the next two years if the Dpad is NOT developed. Of course, erosion is expected if the Dpad is developed as it would likely cannibalize the original Sorion product. It is expected that the new Dpad would reduce Sorion sales by 22,950 units per year for the next two years and market pressure would force the Sorion product to be discounted from its original price of $442/unit to $279/unit. Variable cost/unit of the Sorion are $186 and fixed costs currently are $3,137,000.
Working capital to support the Dpad will be 19.25% of yearly sales for the life of the product which is expected to end after five years for which net working capital will be released back to Acme Inc. The timing of the working capital will be exactly the same as the cash inflows which will be at the end of each year.
Lastly, the marginal corporate Income tax rate is 37.5% and management dictates that the required rate of return for this project will be 15.35%.
- You are to determine NPV and the IRR of the project and give your recommendation to management as to whether or not the company should proceed with the project. In addition, you are to take the initiative and make a recommendation as to what you would reasonably change with respect to the project to make it more lucrative for Acme Inc.
- The presentation must be in the form of an Excel spreadsheet. There are to be NO constant number inputs which would destroy cell referencing for future use. To avoid this, you are to have a separate worksheet tab for data input that you can reference. Do not destroy any cell referencing. Additionally, you are to have separate worksheet tabs for Data Entry, NPV, and IRR.
