Orange Computer decides to sell a new line of foldable smartphones. The phones will sell for $965 per unit with variable cost of $487 per device. The company has spent $840,000 for a marketing study that determined the company will sell 94,000 new generation foldable handsets per year for seven years. The marketing study also determined that the company will lose sales of 9,300 units per year of its prior generation, but larger screen sized handsets. The prior generation, larger screen handsets sell for $1,395 and have variable costs that are 51.25% of the selling price. The company will also increase sales of its companion watch by 12,200 per year. The watch sells for $396 and has variable costs of $183 of total selling price. The fixed cost for the company each year is $15,750,000. The company has already spent $1,600,000 on research and development for the new gadgets. The plant and equipment required will cost $59,100,000 and will be depreciated on a straight-line basis to zero. The equipment will be worthless at the end of the project with no marketable value. The new smartphone will require an increase in net working capital of $4,325,000 that will be returned at the end of the project. The tax rate is 24 percent, and
Orange Computer decides to sell a new line of foldable smartphones. The phones will sell for $965 per unit with variable cost of $487 per device. The company has spent $840,000 for a marketing study that determined the company will sell 94,000 new generation foldable handsets per year for seven years. The marketing study also determined that the company will lose sales of 9,300 units per year of its prior generation, but larger screen sized handsets. The prior generation, larger screen handsets sell for $1,395 and have variable costs that are 51.25% of the selling price. The company will also increase sales of its companion watch by 12,200 per year. The watch sells for $396 and has variable costs of $183 of total selling price. The fixed cost for the company each year is $15,750,000. The company has already spent $1,600,000 on research and development for the new gadgets. The plant and equipment required will cost $59,100,000 and will be depreciated on a straight-line basis to zero. The equipment will be worthless at the end of the project with no marketable value. The new smartphone will require an increase in net working capital of $4,325,000 that will be returned at the end of the project. The tax rate is 24 percent, and
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Orange Computer decides to sell a new line of foldable smartphones. The phones will sell for
$965 per unit with variable cost of $487 per device. The company has spent $840,000 for a
marketing study that determined the company will sell 94,000 new generation foldable handsets
per year for seven years. The marketing study also determined that the company will lose sales of
9,300 units per year of its prior generation, but larger screen sized handsets. The prior
generation, larger screen handsets sell for $1,395 and have variable costs that are 51.25% of the
selling price. The company will also increase sales of its companion watch by 12,200 per year. The
watch sells for $396 and has variable costs of $183 of total selling price. The fixed cost for the
company each year is $15,750,000. The company has already spent $1,600,000 on research and
development for the new gadgets. The plant and equipment required will cost $59,100,000 and
will be depreciated on a straight-line basis to zero. The equipment will be worthless at the end of
the project with no marketable value. The new smartphone will require an increase in net working
capital of $4,325,000 that will be returned at the end of the project. The tax rate is 24 percent, and
the cost of capital is 13 percent.
What is the NPV of this project?
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