SCI Electronics is a midsized electronics manufacturer located in Samut Prakan, Bangkok. The company president is Nopparat Kongsun, who inherited the...

SCI Electronics is a mid sized electronics manufacturer located in Samut Prakan, Bangkok. The company president is Nopparat Kongsun, 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. Tanakit Damcho, 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 million baht to develop a prototype for a new smart phone that has all the features of the existing smart phone but adds new features such as WiFitethering. The company has spent a further 6 million baht for a marketing study to determine the expected sales figures for the new smart phone.

SCI can manufacture the new smart phones for 6,450 baht each in variable costs. Fixed costs for the operation are estimated to run 183 million baht per 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 15,600 baht. The necessary equipment can be purchased for 1,215 million baht and will be depreciated on a seven-year MACRS schedule. It is believed the value of the equipment in five years will be 183 million baht.

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 4,350 baht each and fixed costs of 129 million baht per 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 6,300 baht each. 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.

Nopparat has asked Tanakit to 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 from Tanakit for the new smart phone the company is considering. Nopparat was 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 asked Tanakit to analyze how changes in the price of the new smart phone and changes in the quantity sold will affect the NPV of the project.

Nopparat has asked Tanakit to 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?