Reference no: EM132627903

Question - Baxil Electronics- A Case Study

Baxil Electronics is a midsized electronics manufacturer located in Japan. The company president is Shexana, who inherited the company. When it was founded over 60 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. Jay, a recent MBA graduate, has been hired by the company's ?nance department. One of the major revenue-producing items manufactured by Baxilis a personal digital assistant (PDA). Baxil currently has one PDA model on the market, and sales have been excellent. The PDA is a unique item in that it comes in a variety of tropical colors and is pre programmed to play Jimmy Buffett music. However, as with any electronic item, technology changes rapidly, and the current PDA has limited features in comparison with newer models. Baxil spent $750,000 to develop a prototype for a new PDA that has all the features of the existing PDA but adds new features such as cell phone capability. The company has spent a further $200,000 for a marketing study to determine the expected sales ?gures for the new PDA. (Hint; both $750,000 and $200,000 are considered under sunk cost)

Baxil can manufacture the new PDA for $155 each in variable costs. Fixed costs for the operation are estimated to run $4.7 million per year. The estimated sales volume is 74,000, 95,000, 125,000, 105,000, and 80,000 per each year for the next ?ve years, respectively. The unit price of the new PDA will be $360. The necessary equipment can be purchased for $21.5 million and will be depreciated on a five years straight line method. It is believed the value of the equipment in ?ve years will be $4.1 million.

As previously stated, Baxil currently manufactures a PDA. Production of the existing model is expected to be terminated in two years. If Baxil does not introduce the new PDA, sales will be 80,000 units and 60,000 units for the next two years, respectively. The price of the existing PDA is $290 per unit, with variable costs of $120 each and ?xed costs of $1,800,000 per year. If Baxil does introduce the new PDA, sales of the existing PDA will fall by 15,000 units per year starting from third year, and the price of the existing units will have to be lowered to $255 each. Net working capital (NWC) for the PDAs will be 20 percent of sales and will occur with the timing of the cash ?ows for the year; for example, there is no initial outlay for NWC, but changes in NWC will ?rst occur in year 1 with the ?rst year's sales. Baxil has a 35 percent corporate tax rate and 18 percent required return.

Additionally, because of rapid changes in technology, she was concerned that a competitor could enter the market. This would likely force Baxil to lower the sales price of its new PDA. For these reasons, she has asked Jay to analyze how changes in the price of the new PDA and changes in the quantity sold will affect the NPV with a required return of 12% instead of 18% of the project.

QUESTIONS - What are the factors they may influence producing PDA?