Case Study: Electronics Unlimited

Case Study: Electronics UnlimitedGroup members: Farida Asgarova, Hasan Rzayev, Jeyhun Hasanov, Baba Abbasov, Jasur Fayziev

Instructor: Elmir Musayev

16.04.2015

Case Study: Electronics UnlimitedExecutive SummaryElectronics 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 yearsCost of sales: 60% of sales per yearSGA Expenses: 23.5% of the salesTax Rate: 40%NWC: 27% of salesCost of Equipment: $500,000 (5-year straight-line based depreciation) Introductory Expense: $200, 000Sunk cost: $1.0 million

Years: 0 1 2 3 4 5Sales: 10,000,000 13,000,000, 13,000,000 8,667,000 4,333,000COS -6,000,000 -7,800,000 -7,800,000 -5,200,200 -2,599,800SGA exp. -2,350,000 -3,055,000 -3,055,000 -2,036,745 -1,018,255Deprec. -100,000 -100,000 -100,000 -100,000 -100,000Intro exp. - 200,000 EBIT 1,350,000 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 1,227,000 798,033 368,967

Oper.cash f. 910,000 1,327,000 1,327,000 898,033 468,967 Working c. 2,700,000 3,510,000 3,510,000 2,340,090 1,169,910 0 Chng. in NWC -2,700,000 -810,000 0 1,169,910 1,170,180 1,169,910 Equipment -500,000Total flows -3,200,000 100,000 1,327,000 2,496,910 2,068,213 1,638,877Highlighted 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 2 3 4 5100,000 1,327,000 2,496,910 2,068,213 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.