Statement of the Problem
Dell, Inc. (Dell) is in the personal computer (PC) industry, and is ranked within the top 3 companies of the PC market segment. Despite ranking second in computer sales during 2008, Dell has decided to analyze a potential investment for a new technology that creates a permanent personal picture or message on the laptop casing. This laser etch, Monet technology, is provided by a small company in France for $10 million (technology rights). The proposed plan would generate revenues for two kinds of PC’s. The Inspiron line would generate Monet technology revenues in quarter 2 of fiscal year 2010; moreover, the Vostro line would generate revenues in quarter 3 of fiscal year 2010. Dell must analyze the investment using projections of sales, cash flows, and most importantly customer attach rates through fiscal year 2011. The customer attach rate, rate at which customers will buy the new service, is vital to the Monet technology investment decision.
The marketing team has proposed 3 different pricing and attach rate structures, including:
Sale Price: $100Sale Price: $50Sale Price: Free
Attach rate: 15%Attach rate: 25%Attach rate: 50%
Through sensitivity analysis of cash flows, it is determined that the net present value and internal rate of return are optimal under the $50 sale price and 25% attach rate. The discount rate (8.6%) applied to the cash flow analysis includes current cost of debt, risk-free rate, market rate, and marginal tax rate. The $100 sales price generated a net present value (NPV) of approximately $128 million, an internal rate of return (IRR) of 607%, and a payback period of 3.24 quarters after the investment. Next, the $50 sales price generated an NPV of $71.8 million, an IRR of 342%, and a payback period of 4.01 quarters. Finally, the last option of providing the Monet technology for free is essentially useless. The NPV shows a loss of over $100 million; although the...