Mp3 Project Essay examples

2527 Words Mar 24th, 2013 11 Pages
Report of the MP3 Project | |

Report to Financial Manager

Introduction
This report is intended to outline the feasibility of the production of a new MP3 player, as laid out in the capital budgeting model provided. While the model itself is an abstraction and a simplification of the process, the intention is to produce an accurate estimate of the economics of production. Our model is a cash flow based appraisal techniques as a success of any business can partly be determined by its capacity to generate positive cash flows.

Assumption Process
This patent of the cutting-edge MP3 technique we currently possess will position us strongly for the next five years, and while competition is likely to increase our advertising spending
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The salary will be set at $45,000 each/year. In addition, a manager will be seconded to the project from another department on a salary of $95,000/year. Redundancy packages for five employees of $30,000 is also to be costed, though these represent one-off payments.
At sales side, we expect to sell the new product for $179 each. Our findings based on market research indicate high price sensitivity in the product, which we reflect in the model. There is an inverse relationship between price and units sold: for every $20 increase/decrease in price, we expect to see a 50,000 decrease/increase in the number of units sold, respectively. However, we will also continuously monitor and update the price/sales relationship which is one of the most critical assumptions to ensure a valuable analysis.
Our variable cost is associated with the sales/production, which currently estimated at $80/unit, based on the 1,000,000 unit level. If we are able to achieve 1,500,000, the variable costs will decrease to $50/unit. However, if production decreases to less than 850,000 units, our variable costs will increase to $109/unit.

In terms of working capital, the project will require $7,500,000 in the beginning. After this initial increase the working capital requirements will be 2% of Sales. All working capital will be recouped when you shut down the project in 5 years.
A 10% cost of capital is assumed as per reflecting

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