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Case Study: Electronics Unlimited Group members: Farida Asgarova, Hasan

Rzayev,

Jeyhun Hasanov, Baba Abbasov, Jasur Fayziev Instructor: Elmir Musayev

Case Study: Electronics Unlimited Executive Summary Electronics Unlimited is going to launch a new product which will have expected sales of $49 million in five years. The equipment to manufacture this product will require an investment of $500 thousands. There will be different expenses in the production process, such as selling, general, and administrative expenses in the amount of 23.5% of the sales. Cost of the capital will consist of the 60% of sales each year. In the test marketing, the company will incur sunk cost that will not affect the cost structure.

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.

0

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

Chng. in NWC -2,700,000

-810,000

Equipment

-500,000

Total flows

-3,200,000

100,000

3,510,000

2,340,090

1,169,910

0

0

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

Initial cost: -3,200,000 If we have 20% discount rate, to find NPV we use basic the discounting method and evaluate value of product today:

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.