Smart Electronics Plc

Smart Electronics Plc
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Calculating value of future investments is part of any organisation?s practice today, private or public. Smart Electronics Plc is a Multi Business Enterprise. The industry where Smart Electronics Ltd is operating within has an oligopolistic structure and they are one of the major players. They are listed on the Hong Kong and the London Stock Exchange. The company consists of three divisions. These are mobile devices, home devices and devices for industrial use. For the last three years the overall profitability has not been as predicted and the share price reflects this outcome in both markets where their shares are traded. The MD is now under huge pressure to show and to account for better results. There are rumours within the company and among analysts that he will otherwise be replaced.
Mobile devices division (with head office in New Jersey) has just developed a new electronic device which, when mounted on a vehicle will tell the driver how many miles the vehicle is travelling per gallon of petrol and enables to calculate associated cost. The division undertook some marketing and cost studies to determine probable costs and market potential and they provided the following information:
1. New equipment would have to be acquired to produce the device. The equipment would cost ?630,000 and have a 12 years useful life. After 12 years, it would have a salvage value of ?30,000.
2. Sales in units for the next 12 years are projected to be as follows:
3. Production and sales of the device would require working capital of 120,000, to finance debtors, inventories, and day to day cash needs. This working capital would be released at the end of the project?s life.
4. The device would sell for ?70 each; variable cost of production, administration and sales would be ?30 per unit.
5. Fixed costs for salaries maintenance, property taxes, insurance and straight line depreciation on the equipment would total ?270,000 per year. (Depreciation is based on cost less salvage value)
6. To gain rapid entry to the market the company would have to advertise heavily. The advertising programme would be:
7. Smart Electronics Board of Directors has specified that all new products must have a return of at least 14% to be acceptable.