INVESTMENT DECISION

Topics: Depreciation, Cost, Personal digital assistant Pages: 2 (589 words) Published: February 24, 2014
INVESTMENT DECISION

Tianfu Electronics Ltd is a midsized electronics manufacturer located in Chengdu, China. The company president is Dr. Wang Datong, a graduate from Tsinghua University, who founded the company 20 years ago. The company originally repaired radios and other household appliances. Over the years, the company expanded into manufacturing and is now a reputable manufacturer of various electronic items. Meng Xiaolan, a recent MBA graduate from Fudan University, has been hired by the company’s finance department.

One of the major revenue-producing items manufactured by Tianfu is a personal digital assistant (PDA). Tianfu currently has one PDA model on the market, and sales have been excellent. The PDA is a unique item in that it comes in a variety of tropical colors and is preprogrammed to play traditional and modern music. However, as with any electronic item, technology changes rapidly, and the current PDA has limited features in comparison with newer models. Tianfu spent 1,815,000 yuan (RMB) to develop a prototype for a new PDA that has all the features of the existing PDA but adds new features such as cell phone capability. The company has spent a further 390,000 yuan for a marketing study to determine the expected sales figures for the new PDA.

Tianfu can manufacture the new PDA for 150 yuan each in variable costs. Fixed costs for the operation are estimated to run 4.5 million yuan per year. The estimated sales volume is 70,000, 80,000, 100,000, 85,000, and 75,000 per each year for the next five years, respectively. The unit price of the new PDA will be 340 yuan. The necessary equipment can be purchased for 19.5 million yuan and will be depreciated on a sevenyear schedule, with the depreciation percentages for the first five years being 14.29%, 24.49%, 17.49%, 12.49%, and 8.93%, respectively. It is believed that the market value of the equipment in five years will be 3.3 million yuan.

As previously stated, Tianfu currently manufactures a...
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