Mini Case Conch Republic Electronics Conch Republic Electronics is a midsized el
ID: 2731398 • 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 $205 each in variable costs. Fixed costs for the operation are estimated to run 5.1 million per year. The estimated sales volume is 64,000, 106,000, 87,000, 78,000, and 54,000 per each year for the next five years, respectively. The unit price of the new smart phone will be $485. The necessary equipment can be purchased for $34.5 million and will be depreciated on a 7 year MACRS schedule. It is believed the value of the equipment in 5 years will be $5.5 million. 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 years 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? 5.How sensitive is the NPV to changes in the price of the new smart phone? 6.How sensitive is the NPV to changes in the quantity sold? 7.Should Conch Republic produce the new smart phone? 8.Suppose Conch Republic loses sales on other models because of the introduction of the new model. How would this effect your analysis?
Explanation / Answer
Input Area: Equipment $34,500,000 Salvage value $5,500,000 R&D $750,000 sunk cost Marketing study $200,000 sunk cost Year 1 Year 2 Year 3 Year 4 Year 5 Sales(units) 64,000 106,000 87,000 78,000 54,000 Depreciation rate 14.29% 24.49% 17.49% 12.49% 8.93% Sales of old PDA Lost sales Price $485 VC $205 FC $5,100,000 Price of old PDA Price reduction of old PDA VC of old PDA Tax rate 35% NWC percentage 20% Required return 12% Sensivity analysis New price $260 Lets assume because it is not there in the question. If there then put the value Quantity change 100 NOTE: Change in units per year, same as typed in above Output Area: Sales Year 1 Year 2 Year 3 Year 4 Year 5 New $31,040,000 $51,410,000 $42,195,000 $37,830,000 $26,190,000 Lost sales 0 0 Lost rev. 0 0 Net sales $31,040,000 $51,410,000 $42,195,000 $37,830,000 $26,190,000 VC New $13,120,000 $21,730,000 $17,835,000 $15,990,000 $11,070,000 Lost sales 0 0 $13,120,000 $21,730,000 $17,835,000 $15,990,000 $11,070,000 Sales $31,040,000 $51,410,000 $42,195,000 $37,830,000 $26,190,000 VC 13,120,000 21,730,000 17,835,000 15,990,000 11,070,000 Fixed costs 5,100,000 5,100,000 5,100,000 5,100,000 5,100,000 Dep 4,930,050 8,449,050 6,034,050 4,309,050 3,080,850 EBT $7,889,950 $16,130,950 $13,225,950 $12,430,950 $6,939,150 Tax 2,761,483 5,645,833 4,629,083 4,350,833 2,428,703 NI $5,128,468 $10,485,118 $8,596,868 $8,080,118 $4,510,448 +Dep 4,930,050 8,449,050 6,034,050 4,309,050 3,080,850 OCF $10,058,518 $18,934,168 $14,630,918 $12,389,168 $7,591,298 NWC Beg $0 $6,208,000 $10,282,000 $8,439,000 $7,566,000 End 6,208,000 10,282,000 8,439,000 7,566,000 0 NWC CF ($6,208,000) ($4,074,000) $1,843,000 $873,000 $7,566,000 Net CF $3,850,518 $14,860,168 $16,473,918 $13,262,168 $15,157,298 Salvage BV of equipment $7,696,950 Taxes 768,933 Salvage CF $6,268,933 Net CF Time 0 ($34,500,000) 1 $3,850,518 2 $14,860,168 3 $16,473,918 4 $13,262,168 5 $21,426,230 Payback period 2.958 PI 1.380 IRR 23.80% NPV $13,096,371.21 Sensitivity to change in price Sales Year 1 Year 2 Year 3 Year 4 Year 5 New $16,640,000 $27,560,000 $22,620,000 $20,280,000 $14,040,000 Lost sales 0 0 Lost rev. 0 0 Net sales $16,640,000 $27,560,000 $22,620,000 $20,280,000 $14,040,000 VC New $13,120,000 $21,730,000 $17,835,000 $15,990,000 $11,070,000 Lost sales 0 0 $13,120,000 $21,730,000 $17,835,000 $15,990,000 $11,070,000 Sales $16,640,000 $27,560,000 $22,620,000 $20,280,000 $14,040,000 VC 13,120,000 21,730,000 17,835,000 15,990,000 11,070,000 Fixed costs 5,100,000 5,100,000 5,100,000 5,100,000 5,100,000 Dep 4,930,050 8,449,050 6,034,050 4,309,050 3,080,850 EBT ($6,510,050) ($7,719,050) ($6,349,050) ($5,119,050) ($5,210,850) Tax (2,278,518) (2,701,668) (2,222,168) (1,791,668) (1,823,798) NI ($4,231,533) ($5,017,383) ($4,126,883) ($3,327,383) ($3,387,053) +Dep 4,930,050 8,449,050 6,034,050 4,309,050 3,080,850 OCF $698,518 $3,431,668 $1,907,168 $981,668 ($306,203) NWC Beg $0 $3,328,000 $5,512,000 $4,524,000 $4,056,000 End 3,328,000 5,512,000 4,524,000 4,056,000 0 NWC CF ($3,328,000) ($2,184,000) $988,000 $468,000 $4,056,000 Net CF ($2,629,483) $1,247,668 $2,895,168 $1,449,668 $3,749,798 Salvage BV of equipment $7,696,950 Taxes 768,933 Salvage CF $6,268,933 Net CF Time 0 ($34,500,000) 1 ($2,629,483) 2 $1,247,668 3 $2,895,168 4 $1,449,668 5 $10,018,730 NPV ($27,186,209.93) DNPV/DP $179,033.69 Sensitivity to change in quantity Sales Year 1 Year 2 Year 3 Year 4 Year 5 New $31,088,500 $51,458,500 $42,243,500 $37,878,500 $26,238,500 Lost sales 0 0 Lost rev. 0 0 Net sales $31,088,500 $51,458,500 $42,243,500 $37,878,500 $26,238,500 VC New $13,140,500 $21,750,500 $17,855,500 $16,010,500 $11,090,500 Lost sales 0 0 $13,140,500 $21,750,500 $17,855,500 $16,010,500 $11,090,500 Sales $31,088,500 $51,458,500 $42,243,500 $37,878,500 $26,238,500 VC 13,140,500 21,750,500 17,855,500 16,010,500 11,090,500 Fixed costs 5,100,000 5,100,000 5,100,000 5,100,000 5,100,000 Dep 4,930,050 8,449,050 6,034,050 4,309,050 3,080,850 EBT $7,917,950 $16,158,950 $13,253,950 $12,458,950 $6,967,150 Tax 2,771,283 5,655,633 4,638,883 4,360,633 2,438,503 NI $5,146,668 $10,503,318 $8,615,068 $8,098,318 $4,528,648 +Dep 4,930,050 8,449,050 6,034,050 4,309,050 3,080,850 OCF $10,076,718 $18,952,368 $14,649,118 $12,407,368 $7,609,498 NWC Beg $0 $6,217,700 $10,291,700 $8,448,700 $7,575,700 End 6,217,700 10,291,700 8,448,700 7,575,700 0 NWC CF ($6,217,700) ($4,074,000) $1,843,000 $873,000 $7,575,700 Net CF $3,859,018 $14,878,368 $16,492,118 $13,280,368 $15,185,198 Salvage BV of equipment $7,696,950 Taxes 768,933 Salvage CF $6,268,933 Net CF Time 0 ($34,500,000) 1 $3,859,018 2 $14,878,368 3 $16,492,118 4 $13,280,368 5 $21,454,130 NPV $13,158,821.46 DNPV/DQ $624.50