CASE STUDY

FINA3383: Managerial Finance Spring 2013

CASE 2: The I-Accessory Corporation (IAC) – BLOOD PRESSURE MONITOR

1. Description

IAC produces accessories for Ipads, Iphones, and the Ipod touch. The market for these accessories is a multi-million dollar business and IAC has a piece of it.

IAC is considering the production of a blood pressure monitor for the Ipad, Iphone and the Ipod touch.

The following is the description of the monitor that the marketing department has prepared:

The blood pressure monitor coordinates with your iPhone®, iPad®, or iPod® touch to give you dynamic readings of your blood pressure and heart rate.

Just like a professional healthcare provider would, the monitor measures diastolic blood pressure, systolic blood pressure, and pulse rate. It synchronizes with any iOS device, providing in-depth health data and tracking.

Blood Pressure Monitor specifications:

Connects directly to iPhone®, iPad®, or iPod® touch to monitor blood pressure and pulse rate

Downloading the free app unlocks an array of features and functions not available with traditional monitors

Calculates averages and generates graphs for your reference, making it easy to identify trends as they occur

Simple operation, multi-user capability, and adjustable cuff for use by all family members

Built-in function lets you send results directly to your healthcare provider

FINA3383: Managerial Finance Spring 2013

2. Sales and Pricing Projections

IAC is looking into the feasibility of the blood pressure monitor. A multidisciplinary group at IAC has come up with the following figures:

The project is expected to last 10 years after which IAC will either discontinue the blood pressure monitor or replace it with better one. Projected annual sales are given in the table below.

Year	Unit Sales
1	4,000
2	5,000
3	6,500
4	8,000
5	7,000
6	6,500
7	5,000
8	5,000
9	4,000
10	3,500

The new blood pressure monitor will be priced to sell at $299.99 per unit to start and once IAC’s competitors develop similar monitors the price will drop to $249.99 at the beginning of the fifth year.

3. Cost Projections

The new monitor will require an initial investment in industrial equipment of 2 million dollars, including installation, and will also require an initial investment in Net Working Capital (NWC) of $100,000 dollars in inventory and cash. The industrial equipment will be sold at the end of the tenth year. The NWC for each year of production is 20% of sales for the year and the variable cost per unit is $120 and total fixed costs of $50,000 per year. IAC will also acquire a new computer network system to replace the existing one. The system will be used to improve communications with customers and within the company. It will also help IAC monitor the company’s operations more effectively. The cost of the computer system will be $500,000 and IAC will not sell it at the end of the tenth year.

Since the industrial equipment is primarily production machinery, it qualifies as seven-year MACRS property. The equipment will be worth 20% of its cost in ten years, and the marginal tax rate is 40%. The computer network system qualifies as five-year MACRS property.

The equipment will be installed in an empty warehouse the IAC acquired 5 years ago. At the time IAC paid $370,000 for the warehouse.

FINA3383: Managerial Finance Spring 2013

4. Cost of Capital

Debt: 3,000 bonds with a 8.25 percent coupon rate and a price of $1,050. The bonds have a 10 year maturity and pay annual coupons.

Common stock: 130,000 shares of common stock. The dividends have a growth rateof 6 percent, the current price is $25, and the dividend next year will be $2.50. The beta of the stock is 1.4.

Preferred stock: 10,000 shares of 10 percent preferred stock with a current price of$60 and a par value of $100 per share.

Market: The corporate tax rate is 40 percent, the expected return on the market is 10 percent, and the risk-free rate is 2 percent.

5. Based on this information should IAC proceed?

a. Calculate the breakeven point.

b. Estimate the pro forma income statements and the project’s cash flows: OCF, Changes in NWC, Changes in Capital Spending, and FCF.

c. Calculate the WACC.

d. Calculate NPV and explain why the firm should accept or reject the project.

e. Calculate IRR and explain why the firm should accept or reject the project.

f. Calculate the Payback period.

g. Calculate the PI and explain why the firm should accept or the project.

Complete this problem in a professional manner (NO handwritten solutions will be accepted) to fulfill the take-home part of the third and final midterm exam. This problem accounts for 60 percent of the exam grade.

THE SOLUTION IS DUE DURING THE THIRD MIDTERM EXAM (CHECK YOUR SYLLABUS FOR THE DATE). I WILL NOT ACCEPT ANY PAPERS AFTER THE IN-CLASS PART OF THE EXAM IS TURNED IN, NO EXCEPTIONS.

OVER

FINA3383: Managerial Finance Spring 2013

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