Chapter 11 Mini-Case 6: Crystal Electronics

Crystal Electronics is a mid-sized electronics manufacturer located in Johannesburg.

The company CEO inherited the company. When it was started 70 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.
One of the major revenue producing items manufactured by Crystal is a
printed circuit board (PCB). Crystal currently has one model on the market and sales
have been excellent. However, as with any electronic item, technology changes
rapidly, and the current PCB has limited features in comparison with newer models.
Crystal spent R750 000 to develop a prototype for a new model that has all the
features of the existing board, but has spent a further R200 000 for a marketing study
to determine the expected sales figures for the new model.
Crystal can manufacture the new model for R86 each in variable costs. Fixed
costs for the operation are estimated to run R3 million 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 model will be R250. The necessary
equipment can be purchased for R15 million and will be depreciated on a three-year
50:30:20 schedule. It is believed the value of the equipment in five years will be R3
million.
As previously stated, Crystal currently manufactures a PCB. Production of the
existing model is expected to be terminated in two years. If Crystal does not
introduce the new model, sales will be 80 000 units and 60 000 units for the next two
years, respectively. The price of the existing model is R240 per unit, with variable
costs of R68 each and fixed costs of R1 800 000 per year. If Crystal does introduce
the new PCB, sales of the existing model will fall by 15 000 units per year, and the
price of the existing units will have to be lowered to R220 each. Net working capital
for the PCBs will be 20 per cent of sales and will occur with the timing of the cash
flows for the year; for example, there is no initial outlay for NWC, but changes in
NWC will first occur in Year 1 with the first years sales. Crystal has a 29 per cent
corporate tax rate and a 12 per cent required return. The CEO has asked Pippa Ross,
an MBA graduate recently hired by the companys finance department to prepare a
report that answers the following questions:
1.
2.
3.
4.
5.
6.
7.

What is the payback period of the project?

What is the profitability index of the project?
What is the IRR of the project?
What is the NPV of the project?
How sensitive is the NPV to changes in the price of the new PCB?
How sensitive is the NPV to changes in the quantity sold?
Should Crystal produce the new PDA?