In this case analysis, Global Electronics, Inc.’s HDTV division is attempting to decide whether or not to go forward with an ultra-high-definition television (UHDTV) project that would require fairly significant additional capital expenditure. Violet Cunningham is the capital planning manager is for the division and is responsible for consolidating various inputs for the proposed project including sales, expenses, and tax rates, and use these to calculate its internal rate of return (IRR) and payback period. While Violet’s initial calculations placed the IRR at 10 percent (below the 12.5 percent cost of capital benchmark), she subsequently revised the price and expense inputs to achieve a more attractive IRR of 13.5 percent. However, she is not completely certain which calculation is truly valid, as she has reservations regarding which outcome is more probable. After Violet completed these calculations, information came to light about the actual return on HDTV’s current projects. While valid reasons were presented including unexpectedly-rising labor costs and an increasing input costs, current …show more content…
While Violet’s IRR calculations are not far above the cost of capital, she does factor in both a price decrease and lower demand, which makes the forecasts more conservative. In addition, the 14-16 % IRR produced by adding the TV stand provides enough cushion for some increased expenses while still maintaining an IRR that is at or above the 12.5 percent threshold. Additionally, the division (contrary to David’s suggestion) should look into using overseas vendors to drive down costs, as these savings might outweigh the risks involved. In addition to the project’s economic benefit, it will also provide the company with brand recognition as a technological leader and should increase visibility and market share within the