The Research and Development Division of your company has just developed a new gaming system called the Zed Box. The R&D Division spent $800,000 developing this product and the Marketing Division has spent another $210,000 to assess the market demand. They believe that the Zed Box system has superior graphics and speed, and will have great market appeal at a competitive price of $225. The Marketing Division estimates the following demand for the Zed Box:
|
Year
|
Units
|
|
2012
|
15,500
|
|
2013
|
30,000
|
|
2014
|
30,000
|
|
2015
|
30,000
|
|
2016
|
5,000
|
After that time they believe there would be no more sales of the product as newer products become available. The Zed Box is expected to cost $132 each to manufacture (variable cost). In addition, fixed production costs are estimated at $1 million per year. The manufacturing equipment necessary to produce the games costs $2,800,000 million to buy and would be depreciated at a 30 percent CCA rate. The manufacturing equipment is expected to have salvage value equivalent to 15% of the initial cost. We would need to invest $350,000 in net working capital up front (primarily for inventory) and NWC will rise to 18% of sales. The NWC will be recovered at the end of the project. The required return is 10 percent, and the tax rate is expected to be 42 percent.
Requirements
1. Using an Excel spreadsheet:
- Find the NPV and the IRR of the Zed Box project using the pro forma financial statement method to determine cash flows.
- Enter the input variables in cells of their own at the top of the spreadsheet (so it is easier to do sensitivity calculations).
- Set up the necessary equations by referencing to the input variable cells. The spreadsheet must be formula driven; do not put any numbers in equations, only cell references.
- Use Excel's built-in functions wherever possible (e.g. PV and IRR functions).
- HINTS: Your answer, the NPV of the proposal, should be $41,384 using the base case variables as stated in the proposal above. Appendix 10B in the text shows an example of a similar spreadsheet problem.
2. Breakeven analysis (cash B/E point only)
Set up a formula in Excel (this formula is not built-in) to calculate the cash breakeven point for the base case.
3. Sensitivity analysis
- Identify all the variables used in the proposal that are estimates or are subject to change during the life of the project. Briefly explain why these variables might change.
- Choose 2 variables that you identified above on which to do sensitivity analysis:
- Change these 2 variables (one at a time) in small increments through a fairly broad range of values using your Excel spreadsheet, and show how sensitive the project is to changes in these two variables. Remember, the better your sensitivity analysis, the more information it will give you to interpret and develop your recommendation.
- Present your sensitivity analysis in two Excel tables that summarize the results of your sensitivity analysis (i.e. the NPV, IRR and Breakeven Analysis results at the different values for the input variables). You will need Copy/Paste Special/Value to paste the changed values into your tables. Otherwise the values in your tables will keep changing when you change the input variables.
4. Recommendation
Use the results you obtained in the NPV, IRR, breakeven and sensitivity analysis above to write a one page report on your findings and recommend whether or not we should proceed with the project.
5. You may do this as an individual assignment or with one partner. The grading criteria are the same whether the assignment is done individually or with a partner. If you do the assignment with a partner:
- The maximum group size is 2 students
- Both partners must sign the cover page of the assignment
6. Present this assignment in a professional way. It is your responsibility to communicate clearly to the marker.
7. Hand in
- Page 1, cover page with your name, section number and signatures if you did your assignment with a partner
- Page 2, Excel spreadsheet showing basic problem NPV, IRR and breakeven values (Requirements 1 and 2)
- Page 3, Excel spreadsheet showing formulas in the above spreadsheet. To show formulas, go to Tools on your tool bar, choose Options and then pick the View tab and click on the Formula box. Use Page Preview to make sure that this is printing on one page.
- Page 4, identification of all the variables subject to change (Requirement 3 a)
- Page 5, sensitivity analysis on the two variables you have chosen to analyze (Requirement 3 b). Present this in two Excel tables summarizing the results of your sensitivity analysis (i.e. the NPV, IRR and Breakeven Analysis results at the different values for the input variables).
- Page 6, interpretation and recommendation (Requirement 4).
- Please STAPLE all pages together and do not use report covers or folders.