Batteries Inc. is considering developing a new long life battery for cell phones. You can invest immediately and start production right away.
Production equipment cost $1m and will have a useful life of 5 yrs and will depreciate using the straight line method. At year 4 you believe you can sell the equipment for $0.3m
Net working capital will increase by $1m immediately and be recaptured at year 4.
There are 2 separate customer bases for the batteries:
1) New cell phones- for every new cell phone, one battery will be used. Internal transfer price is $2 now and variable cost per battery to produce is 50 cents.
Production of new cell phone batteries will be 300,000 in first yr and will increase by 10% per year.
2) Existing cell phones- wholesale price is $10 per battery now and variable cost per battery is 50 cents.
Demand for existing cell phone batteries is 1m in first year and will increase by 10% per year. Out of the demand for batteries for the exiting cell phones this company expects to capture 80%.
Battery price and cost will rise 2% above inflation rate. Marketing & admin. fees will cost $0.5m first yr and rise at inflation each year after. Inflation will remain constant at 3%. Tax rate is 34%. Discount rate is 15%.
The calculation are in the attached file.
1. Payback period is when the initial investment is ...
The solution explains the calculation of payback period, accounting rate of return, NPV and profitability index