Assist with Project Management

Conch Electronics is a mid-sized electronics manufacturer located in Tasmania. The company president is Shelley Couts, 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. Jay McCanless, a recent graduate, has been hired by the company's finance department. One of the major revenue-producing items manufactured by Conch Electronics is a personal digital assistant (PDA). Conch Electronics currently has one PDA model on the market, and sales have been excellent. The PDA is a unique item in that it comes in a variety of tropical colours and is pre-programmed to play reggae music. However, as with any electronic item, technology changes rapidly, and the current PDA has limited features in comparison with newer models. Conch Electronics spent $750 000 to develop a prototype for a new PDA that has all the features of the existing PDA but adds new features such as mobile phone capability. The company has spent a further $200 000 for a marketing study to determine the expected sales figures for the new PDA. Conch Electronics can manufacture the new PDA for $155 each in variable costs. Fixed costs for the operation are estimated to run $4.7 million per year. The estimated sales volume is 74 000, 95 000, 125 000, 105 000, and 80 000 per each year for the next five years, respectively. The unit price of the new PDA will be $360. The necessary equipment can be purchased for $21.5 million and will be depreciated over seven years at prime cost. It is believed the value of the equipment in five years will be $4.1 million. As previously stated, Conch Electronics currently manufactures a PDA. Production of the existing model is expected to be terminated in two years. If Conch Electronics does not introduce the new PDA, sales will be 80 000 units and 60 000 units for the next two years, respectively. The price of the existing PDA is $290 per unit, with variable costs of $120 each and fixed costs of $1 800 000 per year. If Conch Electronics does introduce the new PDA, sales of the existing PDA will fall by 15 000 units per year, and the price of the existing units will have to be lowered to $255 each. Net working capital for the PDAs will be 20 per cent 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. Conch Electronics has a 30 per cent corporate tax rate 5. Calculate the NPV of the project. 6. Should Shelley invest into this project? Explain your suggested decision. 7. Assess the reliability of the NPV estimation in Question 5 where the cost of Technology One Ltd equity is used as the required rate of returns for the project. 8. What is your recommendation for Shelly to mitigate the potential forecasting risk in this project evaluation? Explain your answers