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. When it was founded over
70 years ago, the company originally repaired radios and other household appliances. Over the
years, the company still maintain its main service business of repairing household electronics,
which accounts for about 50 percent of its total revenue. The company also expanded into the
business of manufacturing electronic items. You and your team, the Carson College of Business
graduates, are hired by the company's finance department to evaluate a new project for the
company.
One of the major revenue-producing items of Conch Republic's manufacture division is a smart
phone. Conch Republic currently has one smart phone model on the market, and sales have been
excellent. Conch Republic's main competitor on the smart phone market is Apple Inc. (AAPL).
Conch Republic's 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 phones for $215 each in variable costs. Fixed
costs for the operation are estimated to run $6.1 million per year. The estimated sales volume is
155,000, 165,000, 125,000, 95,000, and 75,000 per year for the next five years, respectively. The
unit price of the new smart phone will be $520. The necessary equipment can be purchased for
$40.5 million and will be depreciated on a seven-year MACRS schedule. It is believed the value
of the equipment in five years will be $6.1 million.
As previously stated, Conch Republic currently manufactures a smart phone. Production of the
existing model is expected to be terminated in two years. If Conch Republic does not introduce
the new smart phone, sales will be 95,000 units and 65,000 units for the next two years,
2
respectively. The price of the existing smart phone is $380 per unit, with variable costs of $145
each and fixed costs of $4.3 million per year. If Conch Republic does introduce the new smart
phone, sales of the existing smart phone will fall by 30,000 units per year, and the price of the
existing units will have to be lowered to $210 each. 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; for
example, there is no initial outlay for NWC, but changes in NWC will first occur in Year 1 with
the first year's sales. Conch Republic has a 35 percent corporate tax rate. The company has a
target debt to equity ratio of 1 and is currently AA rated. The overall cost of capital of the
company is 12 percent.
The finance department of the company has asked your team to prepare a report to Shelly, the
company’s president, and the report should answer the following questions.

QUESTIONS:

Can you and your team prepare the income statement table, the operating cash flow (OCF) table, and the total cash flow from assets (CFFA) table?

Explanation / Answer

Solution: New sale lost sale lost revenue net sales variable cost variable cost net v.c

(lost sale)

For 1 year 80600000 11400000 11050000 58150000 33325000 4350000 28975000

for 2 year 85800000 11400000 5950000 68450000 35475000 4350000 31125000

sales year1 year2 year3 year4 year5 sales 58150000 68450000 65000000 49400000 39000000 variable cost 28975000 31125000 26875000 20425000 16125000 fixed cost 6100000 6100000 6100000 6100000 6100000 depreciation 5787450 9918450 7083450 5058450 3616650 EBT 17287550 21306550 24941550 16816550 13158350 tax 6050642 7457293 8729542 5885792 4605422 ni 11236907 13849257 16212008 10930758 8552928 depreciation 5787450 9918450 7083450 5058450 3616650 ocf 17024357 23767707 23295458 15989208 12169578 NWC begining 0 11630000 13690000 13000000 9880000 end 11630000 13690000 13000000 9880000 0 NWC Cf -11630000 -2060000 690000 3120000 9880000 Net cf 5394357 21707707 23985458 19109208 22049578

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