Referencing Styles : Harvard
Right Electronics is an electronics manufacturing company which is based in Adelaide. The company is planning to introduce a new digital monitor into the market. However, in recent times the company has made some bad investment decisions which in turn has impacted their profit bottom line. Thus the senior management requires a thorough analysis of every new product that is introduced to the market. As a business analyst, you have been appointed to advise the senior management on the feasibility of the new product.
An initial analysis conducted by other analysts for the product claim the anticipated net present value (NPV) for the new product line is over $2 million and they have recommended the manufacture of the product based on this assessment.
Your task is to use a decision support system (DSS) and report to the senior management on whether the claim of the NPV being over $2 million is correct or incorrect using the relevant information given in Table 1.
Table 1: Summarised product details
Cost of production: $30.00 per unit
Annual overhead cost: $215,000
Initial investment needed: $1,750,000
Estimated selling price: $52.00 per unit
Market at time of introduction: 420,000 units per year
Market growth: 15% per year
Market share: Most likely 12%
Assumed economically useful lifetime: 4 years, commencing 2015
Discount rate used to analyse new product proposals is 15%
You need to assume that the overhead and initial investment occurs at the START of the respective year, profit occurs at the END of the year and initial investment was only applicable to the first year.
Your task:
Develop a decision support model using Visual DSS using the variables described above. Include comments within your Visual DSS model to explain the variables and your calculations.
Based on the result of your model, what is the net present value (NPV)? Explain whether the claim regarding the NPV being above $2 million is correct or incorrect.