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Mp3 Project

In: Business and Management

Submitted By superfastwxy
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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 projection reflects our assumption that the product will be very competitive. Heavy upfront costs will, however, need to be invested, in order to reach the achievable unit volume of 1,000,000 per year for the first five years. As a result, we are looking at implementing an advertising campaign: the first year will involve a standard $850,000 advertising budget, but with the intention of reducing this level by 15% per year given that momentum has been built. We will also have another advertising expense that will depend on the number of units sold, costed at $7/unit.
From a fixed cost perspective, we expect $17,500,000 per year. New manufacturing equipment for this project is expected to $150,000,000, which can be depreciated straight line over the 5 year life of the project. Separately, we envisage shipping and installation costs of $1,000,000 which can be depreciated over the life of the project. At this stage we intend to donate the equipment to a developing country, which acts as a tax deductible donation but also supports our corporate responsibility program.
In order for the project to be viable, we also need to account for...

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