Conch Republic Electronics is a midsized electronics manufacturer located in Key

Question

Conch Republic Electronics is a midsized electronics manufacturer located in Key West, Florida. The company president is Shelley Couts, who inherited the company. Over the years, the company expanded into manufacturing and is now a reputable manufacturer of various electronic items. 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. Conch republic spent $750,000 to develop a prototype for a new smart phone that has all the features of their existing smart phones. The company has spent a further $200,000 for a marketing study to determine the expected sales firgures for the new smart phone. Conch republic can manufacture the new smart phones for $97 each in variable costs. Fixed costs for the operation are estimated to run $5.3 million per year. The estimated sales volume is 68,000, 79,000, 105,000, 83,000, and 64,000 per year for the next five years, respectively. The unit price of the new smart phone will be $275. The necessary equipment can be purchased for $20.5 million and will be depreciated on a seven-year MACRS schedule. It is believed the value of the equipment in five years will be $3.5 million. Net working capital for the smart phones will be 20 percent of sales and will occur with the timing of the cash flows for the year (i.e., there is no initial outlay for NWC). Changes in NWC will thus first occur in Year 1 with the first year's sales. Conch republic has a 35 percent corporate tax rate and a 12 percent required return.

A.) What is the payback period of the project?

B.) What is the Internal rate of return of the project?

C.) What is the Net present value of the project?

D.) Should Conch Republic produce the new Smart Phone?

Explanation / Answer

Selling price per unit 247.5 VC per unit 97 Fixed cost per year 4200000 Discount rate 19% Tax rate 35% Number of years for the project 5 Model Area (expand as needed): Initial Investments Equipment Purchase 20500000 Working Capital 3000000 Total Investment 23500000 Salvage value 3500000 Annual Net After Tax Cash Flows year 0 year 1 year 2 year 3 year 4 year 5 Initial Investment -23500000 Estimated Sales volume 68000 79000 105000 73000 50000 Sales 16830000 19552500 25987500 18067500 12375000 Variable cost 6596000 7663000 10185000 7081000 4850000 Fixed cost 4200000 4200000 4200000 4200000 4200000 Depreciation 3400000 3400000 3400000 3400000 3400000 Net Income 2634000 4289500 8202500 3386500 -75000 Less: Tax 921900 1501325 2870875 1185275 -26250 Net Income after tax 1712100 2788175 5331625 2201225 -48750 Cash Flow 5112100 6188175 8731625 5601225 3351250 Terminal Year Cash Flows Working capital recovery 3000000 Salvage value 3500000 Yearly cash flow 3351250 Terminal year cashflow 9851250 Alter nothing below this line; area above should be expanded as needed to create a complete model year 0 year 1 year 2 year 3 year 4 year 5 Net Project CF -23500000 5112100 6188175 8731625 5601225 9851250 8 Grading Criteria Cumulative CF -23500000 -18387900 -12199725 -3468100 2133125 11984375 2 Item Pts Score Comments Input area format 8 8 Results Area: Model area format 8 8 Payback period 3.62 years —> note: formula OR number okay here 4 Calc initial invest 8 8 PI 0.902 4 Calc annual OCF 8 8 IRR 14.12% 4 Calc terminal year 8 8 MIRR 16.10% 4 Net Project CF 8 8 NPV ($2,295,332.62) 4 Cum CF 2 2 Results area 20 20 Question 1 6 6 Questions Question 2 6 6 1) Using your spreadsheet model, indicate how much change in NPV occurs with a +1% increase in the discount rate. Question 3 4 4 Question 4 2 2 Question 5 12 12 NPV (at 19%) -2295333 —> note: type number here, not formula 2 Total Score 100 100 NPV (at 20%) -2691121 —> note: type number here, not formula 2 $ change in NPV -395788 1 % change in NPV 17.24% 1 2) Using your spreadsheet model, indicate how much change in NPV (at 19% discount rate) occurs with a 1% decrease in the PDA sales price. NPV at 19% and sales price $275.00 1198461.2 —> note: type number here, not formula 2 NPV at 19% and sales price $272.25 1230223 —> note: type number here, not formula 2 $ change in NPV 31761.76 1 % change in NPV 2.65% 1 3) All other inputs unchanged from original values, how far would the PDA price have to fall before the NPV of the project would be zero (at 19% discount rate)? PDA price causing NPV = 0: 265.57 —> note: type number here, not formula 4 4) All other inputs unchanged from original values, at what discount rate (required return) would the NPV be approximately zero? Discount rate causing NPV = 0: 14.12% —> note: type number here, not formula 2 5) Based on the case information and model results, should Conch Republic produce the new PDA (yes or no, and why)? Consider case facts, all model results, and sensitivity analysis. Conch should not produce the new PDA because it has a negative NPV. This means that net flow from the acceptance of the project will lead to decrease in shareholder’s wealth. The IRR for the project is 14.1% so the project would be accpted only if cut off rate is less than that. In order for the project to even come under consideration the price should be approximately $265.71. Also if the 10% discount is not given and it is possible to maintain the same level of sales the project will be very profitable and cane be accepted because NPV becomes positive and PI is 1.051.

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