Case Study :- Alrayan Electronics CO
Alrayan Electronics (Hypothetical Company) is a midsized electronics manufacturer located in West Bay, Doha. When it was founded over 10 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. A recent CBE graduate has been hired by the company’s finance department.
One of the major revenue- producing items manufactured by Alrayan is a smart phone. Alrayan currently has one smart phone model on the market, and sales have been excellent. The smart phone 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 smart phone has limited features in comparison with newer models. Alrayan spent $1,500,000 to develop a prototype for a new smart phone that has all the features of the existing smart phone but adds new features such as WiFi tethering. The company has spent a further $200,000 for a marketing study to determine the expected sales figures for the new smart phone.
Alrayan can manufacture the new smart phones for $200 each in variable costs. Fixed costs for the operation are estimated to run $ 2 million per year. The estimated sales volume is 100,000, 90,000, 120,000, 110,000 and 80,000 per year for the next five years, respectively. The unit price of the new smart phone will be $500. The necessary equipment can be purchased for $100 million and will be depreciated on a Seven-years MACRS schedule. It is believed the value of the equipment in five years will be $10 million.
As previously stated, Alrayan currently manufactures a smart phone. Production of the existing model is expected to be terminated in two years. If Alrayan does not introduce the new smart phone, sales will be 90,000 units and 80,000 units for the next two years , respectively. The price of the existing smart phone is $400 per unit, with variable costs of $200 each and fixed costs of $3,000,000 per year. If Alrayan dose introduce the new smart phone, sales of the existing smart phone will fall by 20,000 units per year, and the price of the existing units will have to be lowered to $300 each. Net working capital for the smart phones will be 10 million. Alrayan has a 30 percent corporate tax rate and a 10 percent required return.
You need to prepare a memo answering the following questions.
- Is the project attractive to be chosen by the company? Use sufficient tools for your recommendation?
- Define the criteria that we should use to make the decision ?
- What are some more sophisticated measures that you can use to decide on the feasibility of this project? Show clearly using excel files your detailed Procedures. Applies appropriate strategies throughout the solution.
- Show in detail your solving for and highlight how forecasting Risk can be considered in your recommendation? Explain by numbers the sensitivity of your decision to the change in sales figures. Show your detailed solving solution for the problem, and provide your recommendation.