James has been trying to assess the project roll out options after

discussions with his friends who showed interest to invest in the project.
James took voluntary retirement from Volga Electronics Works,
Indonesia after serving as . operations manager for 12 years. He has been
very keen to venture in electronics accessories industry. At the same time ,
these application have become popular in south Asian markets. James
plans to capture a reasonable share of devices in Indian market. James
projection of market potential is 3, 6 and 9 million units in the next three
years ( 2020,2021,2022). In consultation with his friends, who are pricing
experts, he plans to price his product at Rs.2000 per unit for three years
( 2020,2021,2022) which would fetch him 10% share of market given the
specifications he intended to manufacture.
After working on the details of installation, James could figure out
two possibilities- Setting up a big plan of 0.9 million pa capacity in 2019 or
set up small plants of 0.3 million capacity each year for three consecutive
years (2019,2020,2021) and starting operation from 2020 till the end of
2022. The time of construction and complete installation would take around
one year. He intended to salvage the plant / s after three years considering
only a three year time horizon till December 2022 assuming highly uncertain
market after three years. The cost of construction and installation had a
linear relationship with the installed capacity. The cost for setting up 0.1
million units capacity was Rs.100 million. However, the variable cost per
unit sold was likely to be Rs.1280 for bigger plant and Rs. 1500 for smaller
plants. James expected no salvage value at the end of three years in case he
decides for a bigger plant but recovery value of Rs.300 million at the end of
2022 if he decided smaller plants each year for three consecutive years .
For NPV calculation use 8% for small plant option and 9% for bigger
plant.
Q1. Reconcile market potential for next three based on data given in Table 1 & 2.
Q2. Formulate the problem in excel using references and examine options?
Q3.Which option will be better if the demand fluctuates by 50% every year?
Table 1

Income Total Market Demand for PCs ( Million

Year Index Units)
2013 100 1.5
2014 120 1.7
2015 115 1.9
2016 160 1.7
2017 200 2.5
2018 220 2
2019 250 2.8
2020
2021
2022

Table 2

Predicted
Year Income
Index
2020 312
2021 753
2022 1195

Developed by Prof. O.P.Wali for class discussion