Question

Security Manufacturing, Inc. is a producer of surveillance systems. Its current line of surveillance systems are selling excellently. However, in order to cope with the foreseeable competition from other similar products, SM spent $6,400,000 to develop a new line of HD surveillance systems (new model development cost). The comprehensive 1440p HD surveillance system model can be used very well for any small home or business. As a result of the advanced HD analog technology made up of a 4-channel 4K ultra high definition MPX digital video recorder with two 1440p bullet and two 1440p dome weatherproof security cameras, the system can produce videos of remarkable level of clarity and details at the marvelous 2560x1440 resolution for live viewing and recording. This new and professional-grade system can also provide users with sharp HD resolution and outstanding night visions of up to 250 feet. The HD MPX DVR comes with a hard drive size of 5TB and can support a hard drive up to 12TB of video storage. Using the MediaConnect coaxial cables, the MPX system does not only feature HD recording but also facilitates remote viewing and motion notifications. The company had also spent a further $1,300,000 to study the marketability of this new line of HD surveillance systems (marketability studying cost). SM is able to produce the HD surveillance systems at a variable cost of $90 each. The total fixed costs for the operation are expected to be $8,000,000 per year. SM expects to sell 4,000,000 units, 4,500,000 units 3,500,000 units, 2,000,000 units and 1,500,000 units of the new HD surveillance system model per year over the next five years respectively. The HD surveillance systems will be selling at a price of $160 each. To launch this new line of production, SM needs to invest $33,000,000 in equipment which will be depreciated on a seven-year MACRS schedule. The value of the uged equipment is expected to be worth $3,500,000 as at the end of the 5 year project life. SM is planning to stop producing the existing surveillance system model entirely in two years. Should SM not introduce the HD surveillance system, sales per year of the existing surveillance system model will be 1,900,000 units and 1,300,000 units for the next two years respectively. The existing model can be produced at variable costs of $70 each and total fixed costs of $7,500,000 per year. The existing surveillance system model is selling for $130 each. If SM produces the HD surveillance system model, sales of existing model will be eroded by 1,140,000 units for next year and 1,105,000 units for the year after next. In addition, to promote sales of the existing model alongside with the HD surveillance system model, SM has to reduce the price of the existing model to $80 each. Net working capital for the HD surveillance system project will be 25 percent of sales and will vary with the occurrence of the cash flows. As such, there will be no initial NWC required. The first change in NWC is expected to occur in year 1 according to the sales of the year. SM is currently in the tax bracket of 35 percent and it requires a 20 percent returns on all of its projects. The firm also requires a payback of 4 years for all projects.

Answer 1

ANSWER

AS per the given question,

You have asked a question with so many sub parts and fill in the blanks. I have addressed the first 9 or 10 blanks. Please post the balance question separately.

Please enter ALL the dollar amounts (including cash flows) below in whole numbers.

Estimation of sunk costs

Provide below the amounts of the sunk costs you identified from the case description above.

1st sunk cost: $6,400,000 being new model development cost (Use exactly the same wording as in the case background information.)

2nd sunk cost: $1,300,000 being marketability studying cost  (Use exactly the same wording as in the case background information.)

Total sunk costs = $7,700,000

Net Sales Estimation: Use the formula stated below to calculate the net sales.

Year t Net Sales

=Unit sales of new model for Year t × Price of new model

– Reduction in unit sales of existing model for Year t × Current price of existing model

– [(Unit sales of existing model for Year t if new model project is not launched – Reduction in unit sales of existing model if new model project is launched) × (Current price of existing model – Reduced price of existing model)]

SM expects to sell 4,000,000 units, 4,500,000 units, 3,500,000 units, 2,000,000 units and 1,500,000

Sales per year of the existing surveillance system model will be 1,900,000 units and 1,300,000 units for the next two years respectively. If SM produces the HD surveillance system model, sales of existing model will be eroded by 1,140,000 units for next year and 1,105,000 units for the year after next.

Year 1 Net Sales

= 4,000,000 × $ 160 – 1,140,000 × $ 130 – (1,900,000 – 1,140,000) × ($130 – $80 ) = $  453,800,000

Year 2 Net Sales = 4,500,000 × $ 160 – 1,105,000 × $ 130 – (1,300,000 – 1,105,000) × ($130 – $80 ) = $   566,600,000

Year 3 Net Sales = 3,500,000 x $ 160 = $ 560,000,000

Year 4 Net Sales = 2,000,000 x $ 160 = $ 320,000,000

Year 5 Net Sales = 1,500,000 x $ 160 = $ 240,000,000

Please post the balance questions separately

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