Question

Sony Corporation las invested $5.6 million in developing super-thin TVs based on new, organic light-emitting diode technology. The company plans to produce 24.000 units each year for the next five years. The annual production and operating cost is estimated at $350 per unit and will be sold a $400 per unit. Use the internal rate of return method to determine if this investment is worthwhile, assuming the MARR is 5%. (25 points)

Answer 1

Calculation of annual operating cash flow
		Year-1	Year-2	Year-3	Year-4	Year-5
No of units		24,000	24,000	24,000	24,000	24,000
Sale price per unit		$                   400	$                   400	$                   400	$                   400	$                  400
Cost per unit		$                   350	$                   350	$                   350	$                   350	$                  350
Sale- No of units * Sale price		$        9,600,000	$        9,600,000	$        9,600,000	$        9,600,000	$       9,600,000
Less: Operating Cost- No of units * cost per unit		$        8,400,000	$        8,400,000	$        8,400,000	$        8,400,000	$       8,400,000
Contribution		$       1,200,000	$       1,200,000	$       1,200,000	$       1,200,000	$       1,200,000
Calculation of IRR
				2.00%		3.00%
Year	Capital	Operating cash	Total cash flow	PV factor @ 2%	Present values	PV factor @ 3%	Present values
0	$   (5,600,000)		$      (5,600,000)	1.000	$      (5,600,000)	1.000	$      (5,600,000)
1		$        1,200,000	$        1,200,000	0.980	$        1,176,471	0.971	$        1,165,049
2		$        1,200,000	$        1,200,000	0.961	$        1,153,403	0.943	$        1,131,115
3		$        1,200,000	$        1,200,000	0.942	$        1,130,787	0.915	$        1,098,170
4		$        1,200,000	$        1,200,000	0.924	$        1,108,615	0.888	$        1,066,184
5	$                   -	$        1,200,000	$        1,200,000	0.906	$        1,086,877	0.863	$        1,035,131
					$             56,151		$         (104,351)
			IRR	=Lower rate + Difference in rates*(NPV at lower rate)/(Lower rate NPV-Higher rate NPV)
			IRR	'=2%+ (3%-2%)*(56151.4/(56151.4-(-104351)
				2.35%
As we can see that IRR is 2.35% which is less than MARR 5%, the project is not worthwhile.