Chapter 10, Problem 3M

Summary Introduction

Case summary:

Company CR is an electronics manufacturing company that is located in the key west of State F. The president of the company is Person SC, who started the company. The company repairs the radios and home appliances at first when it was started. Over the years, the company has extended its operations and is now a reputed manufacturer of many electronic items. The company for the finance department selects Person JMC as he has recently completed his MBA.

The smart phone is the major revenue-producing item that is manufactured by the company. The current smart phone model of the company has very good sales on the market.

Characters in the case:

• Company CR
• State F
• Person JMC
• Person SC

Adequate information:

• The company currently manufactures smart phones
• If the company does not introduce the new smart phones, then the sales of company would be 80,000 and 60,000 units in the next 2 years.
• The existing smart phone’s price is $310 for a unit, fixed cost is $1.8 million, and the variable cost is $125.
• If the company introduces the new smart phone, there will be a fall in the existing phone by 15,000 units and the price will be reduced to $275.
• The net working capital is 20% of the sales and will take place with the timing of cash flow in the year.
• The corporate tax is 35% and the required return is 12%.
• Person JMC prepares an essential report for further calculation.

To calculate: The project’s internal rate ofreturn.