Answer Happy

Case Study #2 (15 Points) Amorn Electric Company Amom Electric Company is a midsized electronics manufacturer located in Bangkok. The company CEO is Amorn Thaipradit, who inherited the company. When it was founded over 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. Uthai Raksanogb, a recent MBA graduate, has been hired by the company's finance department. One of the major revenue-producing items manufactured by Amorn Electric is a personal digital pad (PDP). Amor Electric currently has one PDP model on the market, and sales have been excellent. The PDP is a unique item in that it comes in a variety of tropical colors. However, as with any electronic item, technology changes rapidly, and the current PDP has limited features in comparison with newer models. Amom Electric spent $800,000 to develop a prototype for a new PDP that has all the features of the existing PDP but adds new features such as cell phone capability. The company has spent a further $250,000 for a marketing study to determine the expected sales figures for the new PDP. Amorn Electric can manufacture the new PDP for $150 each in variable costs. Fixed costs for the operation are estimated to run $4.8 million per year. The estimated sales volume is 74,500, 95,000, 125,500, 105,000, and 80,500 per each year for the next five years, respectively. The unit price of the new PDP will be $365. The necessary equipment can be purchased for $22.5 million and will be depreciated on a seven-year MACRS schedule. It is believed the value of the equipment in five years will be $4.5 million. As previously stated, Amorn Electric currently manufactures a PDP. Production of the existing model is expected to be terminated in two years. If Amorn Electric does not introduce the new PDP, sales will be 80,000 units and 60,000 units for the next two years, respectively. The price of the existing PDP is $280 per unit, with variable costs of S110 each and fixed costs of $1,800,000 per year. If Amom Electric does introduce the new PDP, sales of the existing PDP will fall by 15,500 units per year, and the price of the existing units will have to be lowered to $250 each. Net working capital for the PDP will be 20 percent 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. Amor Electric has a 20 percent corporate tax rate and a 12 percent required retum. Amorn has asked Uthai to prepare a report that answers the following questions.
QUESTIONS 1. What is the payback period of the project? (3 Points) 2. What is the profitability index of the project? (3 Points) 3. What is the IRR of the project? (4 Points) 4. What is the NPV of the project? (5 Points)