1,2 and 3.1
Case Study on Valuing Investment Project
Electronics Unlimited was considering the introduction of a new product and the sales are
projected as follows:
The targeted selling price is $1000 per unit for all the years
Because of intense competition and rapid product obsolescence, sales of the new product
were expected to remain unchanged between the second and third years following
Thereafter, annual sales were expected to decline in the fourth year and
No material levels of revenues or expenses associated with the new product as
expected after five years of sales.
Based on past experience, cost of sales for the new
product was expected to be 65% of total annual sales revenue during each year of its life
Selling, general, and administrative expenses were expected to be 23.5% of total
Taxes on profits generated by the new product would be paid at a 40% rate.
To launch the new product, Electronics Unlimited would have to incur immediate cash
outlays of two types.
First, it would have to invest $1000,000 in specialized new
This capital investment would be fully depreciated on a straight-
line basis over the five-year anticipated life cycle of the new product.
It was not expected
to have any material salvage value at the end of its depreciable life.
No further fixed
capital expenditures were required after the initial purchase of equipment.
Second, additional investment in networking capital to support sales would have to be
Electronics Unlimited generally required 27¢ of net working capital to support
each dollar of sales.
As a practical matter, this buildup would have to be made by the
of the sales year in question (or, equivalently, by the end of the previous year).
As sales grew, further investments in net working capital ahead of sales would have to be
As sales diminished, net working capital would be liquidated and cash recovered.
At the end of the new product’s life cycle, all remaining net working capital would be
liquidated and the cash recovered.
Finally, Electronics Unlimited expected to incur tax-deductible introductory expenses of
$200,000 in the first year of the new product’s sales.
These costs would not be recurring
over the product’s life cycle.
Approximately $1.0 million had already been spent
developing and test marketing the new product.
These expenditures were also one-time
expenses that would not be recurring during the new product’s life cycle.
Projected Sales in units