FINANCE 301 Spring 2013
Instructor: Carlene B. Stabile

Assignment - Capital Budgeting, Breakeven Analysis and Sensitivity Analysis

The Proposal

The Research and Development Division of your company has just developed a new gaming system called the Zed Box. The R&D Division spent $800,000 developing this product and the Marketing Division has spent another $210,000 to assess the market demand. They believe that the Zed Box system has superior graphics and speed, and will have great market appeal at a competitive price of $225. The Marketing Division estimates the following demand for the Zed Box:

|Year |Units |
|2014 |15,500 |
|2015 |30,000 |
|2016 |30,000 |
|2017 |30,000 |
|2018 |5,000 |

After that time they believe there would be no more sales of the product as newer products become available. The Zed Box is expected to cost $132 each to manufacture (variable cost). In addition, fixed production costs are estimated at $1 million per year. The manufacturing equipment necessary to produce the games costs $2,800,000 million to buy and would be depreciated at a 30 percent CCA rate. The manufacturing equipment is expected to have salvage value equivalent to 15% of the initial cost. We would need to invest $350,000 in net working capital up front (primarily for inventory) and NWC will rise to 18% of sales. The NWC will be recovered at the end of the project. The required return is 10 percent, and the tax rate is expected to be 42 percent.

Requirements

1. Using an Excel spreadsheet: • Find the NPV and the IRR of the Zed Box project using the pro forma financial statement method to determine cash flows. • Enter the input variables in cells of their own at