Conch Republic Electronics is a midsized electronics manufacturer located in Key West, FL. The company president is Shelly Couts, who inherited the company. The company originally repaired radios and other household appliances when it was founded more than 70 years ago. Over the years, the company has expanded, and it is now a reputable manufacturer of various specialty electronic items. Jay McCanless, a recent MBA graduate, has been hired by the company in its finance department.

One of the major revenue producing items manufactured by Conch Republic is a smart phone. Conch Republic currently has one smartphone model on the market and sales have 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 Buffet music. However, as with any electronic item, technology changes rapidly, and the current smart phone has limited features in comparison with new models. Conch Republic spent $1.2 million to develop a prototype for a new smart phone that has all the features of existing one but adds new features such as Wifi tethering. The company has spent a further $250, 000 for a marketing study to determine the expected sales figures for the new smart phone.

Conch Republic can manufacture the new smartphone for $210 each in variable costs. Fixed costs for the operation are estimated to run $5.3 million per year. The estimated sales volumes are

64,000

106,000

87,000

78,000

54,000

Per year for each of the next five years. The unit price of the new smart phone will be $515. The necessary equipment can be purchased for $38.5 million and will be depreciated on a seven-year MACRS schedule. It is believed the value of the equipment in five years will be $5.8 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 (There is no initial outlay for the net working capital). Changes in NWC thus occur first in Year1 and the first years sales. Conch Republic has a 22% corporate tax rate and a required of 12%.

Analyze the information given and provide a recommendation to Shelly should Conch Republic produce the new smart phone and will the new model affect sales in the older models?