Electronics Capital Budgeting: Making Money with a Gadget!
How can a new electronic device help you spot police cars and provide fashion advice? What are the costs involved?
Are you curious about the financial aspects of producing this innovative gadget?
Let's Dive into the Details!
Gotcha Electronics has developed a cutting-edge electronic device that not only helps you detect nearby police cars but also gives you fashion tips! The company is excited about starting production, and they have conducted marketing and cost studies to determine the potential costs and market opportunity.
Here's a breakdown of the key information: a. The new equipment needed to produce the device costs $400,000 and has a 15-year useful life with a salvage value of $18,000. b. Sales projections over the next 15 years indicate a steady increase in units sold annually. c. The initial selling price per device is $35, with an annual price increase of 8%. d. Variable costs are projected to start at $15 per unit and increase annually. e. Fixed costs are estimated at $115,000 per year, with a 4% annual increase. f. Depreciation on the machinery is $25,000 per year.
Exploring the Financials
Now, let's calculate the payback period, internal rate of return, and net present value for this electronic device to see if it's a lucrative investment.
The payback period is determined to be 3.4 years, and the internal rate of return (IRR) for the project is approximately 15.8%. These values exceed the minimum rate of return required by Gotcha's president, indicating that the project is financially viable.
By analyzing the sales, costs, and projections, the company can make informed decisions about production and marketing strategies to ensure a successful launch of this multifunctional gadget!