Reference no: EM133014990

Question - Crystal Electronics is a mid-sized electronics manufacturer located in Johannesburg. The company CEO inherited the company. When it was started 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.

One of the major revenue producing items manufactured by Crystal is a printed circuit board (PCB). Crystal currently has one model on the market and sales have been excellent. However, as with any electronic item, technology changes rapidly, and the current PCB has limited features in comparison with newer models.

Crystal spent R750 000 to develop a prototype for a new model that has all the features of the existing board, but has spent a further R200 000 for a marketing study to determine the expected sales figures for the new model.

Crystal can manufacture the new model for R86 each in variable costs. Fixed costs for the operation are estimated to run R3 million per year. The estimated sales volume is 70 000, 80 000, 100 000, 85 000 and 75 000 per each year for the next five years, respectively. The unit price of the new model will be R250. The necessary equipment can be purchased for R15 million and will be depreciated on a three-year 50:30:20 schedule. It is believed the value of the equipment in five years will be R3 million.

As previously stated, Crystal currently manufactures a PCB. Production of the existing model is expected to be terminated in two years. If Crystal does not introduce the new model, sales will be 80 000 units and 60 000 units for the next two years, respectively. The price of the existing model is R240 per unit, with variable costs of R68 each and fixed costs of R1 800 000 per year. If Crystal does introduce the new PCB, sales of the existing model will fall by 15 000 units per year, and the price of the existing units will have to be lowered to R220 each. Net working capital for the PCB's will be 20 per cent 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. Crystal has a 29 per cent corporate tax rate and a 12 per cent required return.

1. What is the payback period of the project?

2. What is the profitability index of the project?

3. What is the IRR of the project?

4. What is the NPV of the project?

5. How sensitive is the NPV to changes in the price of the new PCB?

6. How sensitive is the NPV to changes in the quantity sold?

7. Should Crystal produce the new PDA?