Conch Republic can manufacture the new smart phones for $300 each in variable co

Question

Conch Republic can manufacture the new smart phones for $300 each in variable costs. Fixed costs for the operation are estimated to run $4.3 million per year. The estimated sales volume is 75,000, 95,000, 125,000, 130,000, and 140,000 per year for the next five years, respectively. The unit price of the new smart phone will be $650. The necessary equipment can be purchased for $61 million and will be depreciated on a seven-year MACRS schedule. It is believed the value of the equipment in five years will be $3.4 million.
Shelley has asked you to prepare a report that answers the following questions.

Please use template below to show answer in excel.

Input:

4.46%

Year 1 Year 2 Year 3 Year 4 Year 5 Units Sales                 75,000          95,000           125,000        130,000    140,000 Equipment Cost        61,000,000 Salvage value           3,400,000 Units Price                       650 Variable cost (per unit)                       300 Fixed costs (per year)           4,300,000 Tax rate 35% NWC (% of sales) 15% Required return 12% Required Payback Period (years)                             3 MACRS Schedule Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 3-year 33.33% 44.45% 14.81% 7.41% 5- year 20.00% 32.00% 19.20% 11.52% 11.52% 5.76% 7-year 14.29% 24.49% 17.49% 12.49% 8.93% 8.92% 8.93%

4.46%

Pro Forma Income Statements Year Year 1 Year 2 Year 3 Year 4 Year 5 Revenues          48,750,000          61,750,000         81,250,000        84,500,000        91,000,000 Variable costs          22,500,000          28,500,000         37,500,000        39,000,000        42,000,000 Fixed costs             4,300,000             4,300,000            4,300,000           4,300,000           4,300,000 Depreciation             8,716,900          14,938,900         10,668,900           7,618,900           5,447,300 EBIT          13,233,100          14,011,100         28,781,100        33,581,100        39,252,700 Taxes (35%)             4,631,585             4,903,885         10,073,385        11,753,385        13,738,445 Net income             8,601,515             9,107,215         18,707,715        21,827,715        25,514,255 OCF       17,318,415       24,046,115      29,376,615     29,446,615     30,961,555 Net Working Capital Year Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Initial NWC                              -   Ending NWC NWC cash flow Salvage Value Market value of salvage Book value of salvage Taxes on sale: Aftertax salvage value: Project Cash Flows Year Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 OCF Change in NWC Capital spending Total cash flow Cumulative cash flow Question 1 Value Decision Payback Period Question 2 NPV Question 3 IRR Question 4 Profitability Index Question 5 Target Sales Price

Explanation / Answer

Statement showing depreciation

Statement showing WC requirement

Statement showing cash inflow from sale of asset

Statement showing NPV

PI = PV of cash inflow/PV of cash outflow

=138122500/61000000

=2.264

IRR is the rate at which NPV is 0

At 26.96% NPV comes to 0, hence IRR =26.96%

Payback period

Thus 19635470/29376615

=0.6684

Thus payback period = 2+0.6684

=2.6684 years

Year Opening balance Depreciation rates Depreciation Closing balance 1 61000000 14.29% 8716900 52283100 2 52283100 24.49% 14938900 37344200 3 37344200 17.49% 10668900 26675300 4 26675300 12.49% 7618900 19056400 5 19056400 8.93% 5447300 13609100 6 13609100 8.92% 5441200 8167900 7 8167900 8.93% 5447300 2720600 8 2720600 4.46% 2720600 0

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