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Conch Republic Electronics is a midsized electronics manufacturer located in Key West, Florida. The company president is Shelly Couts, who inherited the company. The company originally repaired radios and other household appliances when it was founded over 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 smart phone 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 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 $300,000 to develop a prototype for a new smart phone that has all the features of the existing one 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 $190 each in variable costs. Fixed costs for the operation are estimated to run $2.5 million per year. The estimated sales volume is 73,000, 85,000, 91,000, 87,000, and 50,000 per year for the next five years, respectively. The unit price of the new smart phone will be $360. The necessary equipment can be purchased for $13.5 million and will be depreciated on a seven-year MACRS schedule. It is believed the value of the equipment in five years will be 1.2 million. Net working capital for the smart phones will be 11 percent of next year sales. Conch Republic has a 33 percent corporate tax rate and a required return of 11 percent. Shelly has asked Jay to prepare a report that answers the following questions: Questions 1. What is the payback period of the project? 2. What is the profitability index of the project? 3. What is the IRR of the project? 4. What is the NPV of the project? 5. Perform a sensitivity analysis for the price of the new smart phone. Measure the effects on NPV by moving price 5% up and down. 6. Perform a sensitivity analysis for the quantity of phones sold. Measure the effects on NPV by moving quantity 5% up and down 7. Should Conch Republic produce the new smart phone?, 8. Suppose Conch Republic loses sales on other models because of the introduction of the new model. How would this affect your analysis? 52 6 v fx C D E F H B Counch Republic Electronics YEAR 2 73.000 85.000 91.000 87.000 50.000 190100 2,500,000.00 300.00 3 SEOLOOS 360.00 360.003 300.00$ 380.00 330 11.08 2,890,800.00 11% 13,500,000 0% of equipment cost Background Data: Unit Sales Estimates Variable Cost lunat 5 Fixed Costs per year IS Sale Price per unit 3 Tax Rate Required Return on Project Yr ONWC 13 NWC % of sales Equipment cost - installed $ Salvage Value in year 5 5 Depreciation Calculations: Equipment Depreciable Base MACRS % (Eqpt-Zyr) Recovery Allowance Book Value 2 After-Tax Salvage Value 4 Salvage Value Book Value (Year 5) Capital Gain/Loss 7 Taxes Net SV (SV-Taxes) 13,500,000 9.10% 14.50% 1957500 24.00% 3240000 10 200.000 18.00% 2430000 11.070,000 12.00% 1820000 11,880,000 1228500 12.271,500 11,542,500 0 0 0 0 0 1 2 Required Net Working Capital Investment -1 2 3 YEAR 14 Initial Investment Equipment Cost Sales 17 Variable Costs Fixed Costs 39 Depreciation (Eqpt)) 13.500DDD 18.000.000 9.500.000 30.800,000 16.150,000 2.500,000 3.240.000 32.780,000 17290.000 2.500.000 2.430,000 2,500,000 31,320,000 16,530,000 2.500.000 1.620,000 120.650.00 8814,500) 1.228,500 26. 260.000 13,870,000 2,500,000 1,957,500 327,8001 18 04.025) 112,229.25) 11957 500 10, 221,925) 0 EBT 1221220,000 E332015 12 121.890.00 223,700) 14.300) 3200 000 11.420 300) 13228.000 1430,005) 1863,095) 1.228.500 1. BR.400) 240.000 (141,835,500) 1.620.000 Takes Net Operating income Add back Depreciation CASH FLOW from Operations NWC investment & Recovery Salvage Value TOTAL PROJECTED CF 44 0 12.457 800) 112.218,500) 0 783095) 0 0 0 0 0 o 0 0 10 Discounted Cash Flows OT 0 10 0 0 0 Cumulative cash flows 0 0 0 0 20 48 49 50 51 52 53 54 55 56 57 NPV IRR 30 100% Payback 10 CRE Scenario Conch Republic Electronics is a midsized electronics manufacturer located in Key West, Florida. The company president is Shelly Couts, who inherited the company. The company originally repaired radios and other household appliances when it was founded over 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 smart phone 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 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 $300,000 to develop a prototype for a new smart phone that has all the features of the existing one 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 $190 each in variable costs. Fixed costs for the operation are estimated to run $2.5 million per year. The estimated sales volume is 73,000, 85,000, 91,000, 87,000, and 50,000 per year for the next five years, respectively. The unit price of the new smart phone will be $360. The necessary equipment can be purchased for $13.5 million and will be depreciated on a seven-year MACRS schedule. It is believed the value of the equipment in five years will be 1.2 million. Net working capital for the smart phones will be 11 percent of next year sales. Conch Republic has a 33 percent corporate tax rate and a required return of 11 percent. Shelly has asked Jay to prepare a report that answers the following questions: Questions 1. What is the payback period of the project? 2. What is the profitability index of the project? 3. What is the IRR of the project? 4. What is the NPV of the project? 5. Perform a sensitivity analysis for the price of the new smart phone. Measure the effects on NPV by moving price 5% up and down. 6. Perform a sensitivity analysis for the quantity of phones sold. Measure the effects on NPV by moving quantity 5% up and down 7. Should Conch Republic produce the new smart phone?, 8. Suppose Conch Republic loses sales on other models because of the introduction of the new model. How would this affect your analysis? 52 6 v fx C D E F H B Counch Republic Electronics YEAR 2 73.000 85.000 91.000 87.000 50.000 190100 2,500,000.00 300.00 3 SEOLOOS 360.00 360.003 300.00$ 380.00 330 11.08 2,890,800.00 11% 13,500,000 0% of equipment cost Background Data: Unit Sales Estimates Variable Cost lunat 5 Fixed Costs per year IS Sale Price per unit 3 Tax Rate Required Return on Project Yr ONWC 13 NWC % of sales Equipment cost - installed $ Salvage Value in year 5 5 Depreciation Calculations: Equipment Depreciable Base MACRS % (Eqpt-Zyr) Recovery Allowance Book Value 2 After-Tax Salvage Value 4 Salvage Value Book Value (Year 5) Capital Gain/Loss 7 Taxes Net SV (SV-Taxes) 13,500,000 9.10% 14.50% 1957500 24.00% 3240000 10 200.000 18.00% 2430000 11.070,000 12.00% 1820000 11,880,000 1228500 12.271,500 11,542,500 0 0 0 0 0 1 2 Required Net Working Capital Investment -1 2 3 YEAR 14 Initial Investment Equipment Cost Sales 17 Variable Costs Fixed Costs 39 Depreciation (Eqpt)) 13.500DDD 18.000.000 9.500.000 30.800,000 16.150,000 2.500,000 3.240.000 32.780,000 17290.000 2.500.000 2.430,000 2,500,000 31,320,000 16,530,000 2.500.000 1.620,000 120.650.00 8814,500) 1.228,500 26. 260.000 13,870,000 2,500,000 1,957,500 327,8001 18 04.025) 112,229.25) 11957 500 10, 221,925) 0 EBT 1221220,000 E332015 12 121.890.00 223,700) 14.300) 3200 000 11.420 300) 13228.000 1430,005) 1863,095) 1.228.500 1. BR.400) 240.000 (141,835,500) 1.620.000 Takes Net Operating income Add back Depreciation CASH FLOW from Operations NWC investment & Recovery Salvage Value TOTAL PROJECTED CF 44 0 12.457 800) 112.218,500) 0 783095) 0 0 0 0 0 o 0 0 10 Discounted Cash Flows OT 0 10 0 0 0 Cumulative cash flows 0 0 0 0 20 48 49 50 51 52 53 54 55 56 57 NPV IRR 30 100% Payback 10 CRE Scenario