Mini Case Conch Republic Electronics Conch Republic Electronics is a midsized el
ID: 2613630 • Letter: M
Question
Mini Case
Conch Republic Electronics
Conch Republic Electronics is a midsized electronics manufacturer located in Key West, Florida. The company president is Shelly Couts, who inherited the company. When it was founded over 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. Jay McCanless, a recent MBA graduate, has been hired by the company's finance department.
One of the major revenue-producing items manufactured by Conch Republic is smart phone. Conch Republic currently has one smart phone model on the market, and sale has been excellent. The smart phone is a unique item in that it comes in a variety of tropical colors and is preprogrammed to play Jimmy Buffett music. However, as with any electronic item, technology changes rapidly, and the current smart phone has limited features in comparison with newer models. Conch Republic spent $750,000 to develop a prototype for a new smart phone that has all the features of the existing smart phone but adds new features such as wifi tethering. The company has spent a further $200,000 for a marketing study to determine the expected sales figures for the new smart phone
Conch Republic can manufacture the new smart phone for $185 each in variable costs. Fixed costs for the operation are estimated to run 5.1 million per year. The estimated sales volume is 74,000, 95,000, 125,000, 105,000, and 80,000 per each year for the next five years, respectively. The unit price of the new smart phone will be $480. The necessary equipment can be purchased for $38.5 million and will be depreciated on a 7 year MACRS schedule. It is believed the value of the equipment in 5 years will be $5.4 million.
As previously stated, Conch Republic currently manufactures a smart phone. Production of the existing model is expected to be terminated in 2 years. If Conch Republic does not introduce the new smart phone, sales will be 80,000 units and 60,000 units for the next two years, respectively.
The price of the existing smart phone I $310 per unit, with variable costs of $125 each and fixed costs of $1,800,000 per year. If Conch Republic does introduce the smart phone, sales of the existing smart phone will fall by 15,000 units per year, and the price of the existing units will have to be lowered to $275 each.
Net working capital for the smart phones will be 20% of sales and will occur with the timing of the cash flows for the year (i.e. there is no initial outlay for net working capital). Changes in the net working capital will thus first occur in year 1 with the first year’s sales. Conch Republic has a 35% corporate tax rate and a required rate of 12% Shelly has asked Jay to prepare a report that answers the following questions:
1. What is the payback period of the project?
2. What is the profitability index of the project?
3. What is the IRR of the project?
4. What is the NPV of the project?
Please show any and all computations required
Explanation / Answer
Answer:
BV of equipment=(38500000-5501650-9428650-6733650-4808650-3438050)
=8589350
Taxes on sale of equipment=(BV-MV)(tc)=(8589350-5400000)(0.35)=$1116272.5
Cf on sale of equipment=$5400000+$1116272.5=$6516272.5
So the cash flow of the projects are:
Answer:1 Payback Period:
2 years+16618644.5/20421778
=2.81 years
Answer:2 PI=PV of cash flows/Intial investment
=57863434/$38500000=1.503
Answer:3
Answer:4
Sales Year 1 Year 2 Year 3 Year 4 Year 5 Sales 35520000 45600000 60000000 50400000 38400000 VC 13690000 17575000 23125000 19425000 14800000 Fixed costs 5100000 5100000 5100000 5100000 5100000 Depreciation 5501650 9428650 6733650 4808650 3438050 EBT 11228350 13496350 25041350 21066350 15061950 Tax 3929923 4723723 8764472.5 7373223 5271683 NI 7298428 8772628 16276878 13693128 9790268 Dep 5501650 9428650 6733650 4808650 3438050 OCF 12800078 18201278 23010528 18501778 13228318 NWC Beg 0 7104000 9120000 12000000 10080000 END 7104000 9120000 12000000 10080000 7680000 NWC CF -7104000 -2016000 -2880000 1920000 2400000 Net CF 5696078 16185278 20130528 20421778 15628318