Egypt Revolution Inc.

 Egypt Revolution Inc. is a subsidiary of Egypt Tele-Comm. Inc. and manufactures electronics. You are hired as an MBA graduate by the finance department. Your first job with Egypt Revolution Inc. is to evaluate the new smart phone project the company is pondering.

Smart phone production has been one of the major revenue-producing parts of the company. Egypt Revolution Inc. currently has one smart phone on the market, and sales have been excellent. However, smart phone business changes rapidly as the underlying technology changes, adding new features that make old ones obsolete. The company spent $750,000 to develop a prototype for a new smart phone that has all the features of the existing one with added new, fancy features. The company has also spent $200,000 more for a marketing study to determine the expected sales figures for the new smart phone.

Egypt Revolution Inc. expects to manufacture the new smart phones for $185 each in variable costs. Fixed costs for the operations are estimated to run $5.3 million per year. The estimated sales volume is 74,000, 95,000, 125,000, 105,000, and 80,000 per year for the next five years, respectively. The unit price of the new smart phone will be $480. The necessary equipment can be purchased for $38.5 million and will be depreciated on a seven-year MACRS schedule. It is believed the value of the equipment in five year will be $5.4 million. (You already have depreciation information in your text for yearly depreciation for seven-year asset class, chapter-6, textbook). 

As mentioned above, Egypt Revolution Inc. currently manufactures a smart phone. Production of the existing model is expected to be terminated in two years. If the company does not introduce the new smart phone, sales will be 80,000 units and 60,000 units for the next two years, respectively. The price of the existing smart phone is $310 per unit, with variable costs of $125 each and fixed costs of $1,800, 000 per year. If the company does introduce the new smart phone, sales of the existing smart phone will fall by 15,000 units per year, and the price of the existing units will have to be lowered to $275 each. 

Net working capital for the smart phones 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. Egypt Revolution Inc. has a 35 percent corporate tax rate and 12 percent required return.

QUESTIONS:

1. What is the payback period of the project?

2. What is the profitability index of the project?

3. What is the IRR of the project?

4. What is the NPV of the project?