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Moto Goo Corporation is an innovative mobile communication d

Moto Goo Corporation is an innovative mobile communication device firm that specializes in researchi… Show more Moto Goo Corporation is an innovative mobile communication device firm that specializes in researching then commercially developing products. The company has been working on an advanced smart phone device that is small enough it can be worn around the neck or attached to your collar. It operates on voice command and has a 3D holographic display. Moto Goo has done some preliminary test marketing and needs to decide whether to begin full scale manufacturing of the phone. Moto Goo has the patent on the essential innovative part of this phone and there are seven years remaining on the patent. Moto Goo believes this patent is important and even if they do not decide to manufacture, they will continue to maintain the patent. Eight years ago the patent cost $50 million to develop and file. Every year Moto Goo has to defend their intellectual property from patent infringements. If the patent is not yet in full scale production, the patent defense costs $100,000 per year. Once the patent is in full scale production, the cost of patent defense is $1 million a year. All of the patent defense estimates are in after tax real dollars. Moto Goo paid $200,000 for marketing research which estimated the most likely sales upon introduction will start at 1 million units per year and grow 15% per year for 3 years. After the initial growth period, sales will level off. In addition, the sale of the new phone will reduce the after tax sales of Moto Goo’s other phones by $80 million in the first year of phone sales. In the most likely case, the reduction in other phone after tax dollar sales of $80 million will decrease (i.e., get closer to zero) by 15% per year for 3 years then level off. Though patent defense is an important part of defending technology, it is possible that competitors will be able to quickly bring similar phones to market. If this occurs, sales volume will still begin at 1 million units per year but sales will not grow during the life of the project. Also, Moto Goo’s reduction in other phone sales will stay at $80 million after tax for the life of the project. According to the marketing research firm, the phone will sell for $350 per unit in the first year of production and decrease in sales price by 5% per year thereafter. Finally, Moto Goo is learning how to leverage its phones by selling additional data plans and accessories. The most likely scenario is that the new phones will generate peripheral sales that will contribute $25 per phone to gross profit. However, if the phone really sparks people’s imagination, it is possible that peripheral sales will contribute $100 per phone. Moto Goo’s operations office estimates that variable costs will be 60% of sales revenue and fixed costs will be $50,000,000 a year. Similar to other plants, Moto Goo headquarters will assess a charge of 1% of variable costs to cover headquarters’ overhead. In addition, they estimate the net working capital will be 20% of sales in the first year of sales then 10% of sales every year thereafter. Net working capital will be recovered at the end of the project. Moto Goo plans on financing $4 million of the buildings by issuing a 10-year, 5% annual coupon bond. They also believe that the new return on equity will be 11.67%. To begin manufacturing, the firm will need to update and convert an existing Moto Goo plant that another division of the company currently uses for storage. This plant was built 10 years ago for a total cost of $50 million and is just beginning its 11 th year of depreciation on a 20 year MACRS schedule. To replace the lost storage for the other division, Moto Goo will buy a warehouse today for $15 million dollars and the new facility will be depreciated on 20 year MACRS schedule. The operating costs for the old and new warehouse function will be similar. Your real estate advisors estimate that the plant will be worth $5 million at the end of the project and the warehouse will be worth $2 million. To update the plant, the cost for equipment will be $5 million today and $5 million at the end of the first year. The equipment will be deductable on a 3 year MACRS schedule. At the beginning of the second year, the plant will be fully operational. The equipment will be worth $1 million at the end of the project. The marginal tax rate for Moto Goo is 30%, inflation is predicted to be 3% and similar risk projects have a required rate of return of 10.5%. Though the finance department believes their current estimate is the most likely required rate of return, they believe it is possible that the required return on the project may increase to 13%. All estimates, unless specifically noted, are in nominal dollars. You believe the appropriate economic life of this project is that the plant will be in production for seven years. Use the most likely estimate of cash flows to answer question (a)-(f). Using the FCF method, what is the most likely NPV of this project? Would you accept it? What is the IRR for this project? Assume Moto Goo requires a 14% return on a project, would you accept the project? (If the IRR is not a good method for these types of cash flows, how would you estimate the best IRRs?) What is the payback period for this project (include all initial building and equipment costs in the initial costs)? Assume Moto Goo wants to be paid back in 5 years, would you accept this project? What is the benefit to cost ratio of the project? What is the Modified IRR for this project is they can invest their intermediate flows at 10.5%? Assume Moto Goo requires a 12% payback on MIRR, would you accept the project? You have been asked to present the valuation consequences of this project to the Board of Directors. The Board is particularly interested in viewing this project from the perspective of the shareholders. What valuation method should you use? Execute this analysis. Compare and contrast these methods, would you recommend accepting the project? (Do this concisely, it should not take more than a reasonably short paragraph.) Based on the given information, what are all possible outcomes for this project? How would you suggest dealing with the uncertainty in the estimations? Does the uncertainty change your decision to accept or reject the project? Why? • Show less

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