Case Study 2: 15 Marks Electronics Communications Technology
Case Study 2 15 Markelectronics Communications Technology Investmen
Case Study 2 (1,5 mark) Electronics Communications Technology Investment Development Corporation (ELC), Part II Electronics Communications Technology Investment Development Ltd., Co., Elcom’s forerunner, was set up in 1995. In 2003, the Company operated in the form of JSC with an initial charter capital of VND10 billion. The Company’s current charter capital is VND211.25 billion. Elcom now is provider of software and system products for network providers. The Company’s operations focus on commercial agents; producing software and integrating software.
In addition, the Company has some real estate and mineral exploiting projects. The Company is now the first unit in Vietnam as well as in the world which successfully studies the application of E-meeting system solution with MPEG and 3G technologies. Its competitors are Huawei, ZTE ( China), NEO, FPT, Siseo (US). The chairman of Board of Directors is Phan Chien Thang and Äang Thi Thanh Minh has been hired by the company as a chief accountant. One of the major revenue-producing items manufactured by ELC is Call Accounting System (CAS) for prepayment subscribers IN/Convergent billing of Vietnam mobile and Gtel, and 90% share market of Vinaphone.
ELC has one CAS model on the market, and sales has been excellent. Products of the sector must be continuously updated to avoid being backward; however, telecommunication infrastructure in Vietnam is not synchronous, causing difficulties for the development of the Company. Furthermore, as with any electronic item, technology changes rapidly, together with the number of mobile phone subscribers saturated is an obstacle for the growth of telecommunication sector in the future. Therefore, the current CAS has limited features in comparison with newer models. ELC spent $750,000 to develop a prototype for a new CAS that has all features of the existing CAS but adds more new features.
The company has spent a further $200,000 for a marketing study to determine the expected sales figures for the new CAS. ELC can manufacture the new CAS for $150 each in variable costs. Fixed costs for the operation are estimated to run $4.5 million per year. The estimated sales volume is 70,000, 80,000, 100,000, 85,000, and 75,000 per each year for the next 5 years, respectively. The unit price of the new CAS will be $340.
The nexceesary equipment can be purchased for $16.5 million and will be depreciated on a seven-year MACRS schedule. It is believed the value of equipment in 5 years will be $3.5 million. As previously stated, ELC currently manufactures a CAS. Production of the existing model is expected to be terminated in two years. If ELC does not introduce the new CAS, sales will be 80,000 units and 60,000 units for the next two years, respectively.
The price of the existing CAS is $280 per unit, with variable costs of $120 each and fixed costs of $1,800,000 per year. If ELC does introduce the new CAS, sales of the existing CAS will fall by 15,000 units per year, and the price of the existing units will have to be lowered to $240 each. Net working capital for the CASs will be 20% of sales and will occur with the timing of cash flows for the year; for example, there is no initial layout for NWC, but changes in NWC will first occur in year 1 with the first year’s sales. ELC has a 35% corporate tax rate and a 12% required return. Mrs. Thang asked Ms. Minh to prepare a report that answers the following questions: 1. What is the profitability index of the project? 2. What is the IRR of the project? 3. What is the NPV of the project?
Paper For Above instruction
This analysis aims to evaluate the financial viability of the Electronics Communications Technology Investment Development Corporation's (ELC) proposed introduction of a new Call Accounting System (CAS). The evaluation involves calculating the project's profitability index (PI), internal rate of return (IRR), and net present value (NPV). These metrics assist in determining whether the investment aligns with the company’s strategic and financial objectives, considering the company's current market position, technological landscape, and competitive pressures.
Background and Context
ELC has established itself as a prominent software and system provider for telecommunications networks in Vietnam, capturing a significant market share, especially with its CAS products. The existing CAS model has enjoyed considerable success; however, technological advancements and market saturation pose challenges to sustained growth. The company has developed a new, feature-rich CAS prototype, investing $750,000 in development and an additional $200,000 in marketing research. The projected manufacturing cost per unit is $150, with an anticipated retail price of $340 per unit. Sales forecasts over five years are optimistic but subject to market dynamics, competition, and technological changes.
Investment Details and Costs
The total initial investment includes purchasing equipment valued at $16.5 million, depreciated over seven years via MACRS, with an expected salvage value of $3.5 million after five years. Fixed operational costs are estimated at $4.5 million annually, with variable costs of $150 per unit. The company's current manufacturing of CAS will phase out in two years if the new product is launched. For the existing CAS, sales are projected to dip from 80,000 units to 60,000 units in the coming two years, with prices adjusting from $280 to $240 per unit if the new CAS is introduced, reflecting market competition and product substitution effects.
Financial Projections and Assumptions
The strategic analysis assumes a corporate tax rate of 35%, affecting net income and cash flows. The company’s required rate of return is 12%. Forecasted sales volumes for the new CAS are: 70,000 in Year 1, 80,000 in Year 2, 100,000 in Year 3, 85,000 in Year 4, and 75,000 in Year 5. The project’s cash flows consider changes in net working capital (NWC), calculated as 20% of sales, which impacts cash flow timing. The analysis evaluates the project's profitability and feasibility under these assumptions, providing decision-makers with insights into its financial attractiveness.
Calculating the Metrics
To compute the NPV, IRR, and profitability index, a detailed cash flow analysis is necessary. Initial cash outflows include equipment costs, development, and marketing expenses. Operating cash inflows are derived from sales revenues minus variable and fixed costs, adjusted for taxes, and considering depreciation benefits. Changes in net working capital are incorporated at appropriate intervals. Profitability index is calculated as the ratio of present value of cash inflows to initial investment. IRR is identified as the discount rate that equates the present value of inflows to outflows, indicating the project's yield. NPV measures the discounted net benefit of all cash flows at the company's required rate of return, guiding investment decisions.
Conclusion
Given the projected sales, costs, and market conditions, the analysis will provide a comprehensive view of the potential profitability of launching the new CAS. The calculated PI, IRR, and NPV will inform management whether the project creates value and aligns with strategic growth initiatives, considering technological shifts, market saturation, and competitive risks.