Conch Republic spent $750,000 to develop a prototype for a new PDA that has all

Question

Conch Republic spent $750,000 to develop a prototype for a new PDA that has all the features of the existing one, but adds new features such as cell phone capability. The company spent further $200,000 for a marketing study to determine the expected sales figure for the new PDA.

Conch Republic can manufacture the new PDA for $215 each in variable costs. Fixed costs for the operation are estimated to run $4.3 million per year. The estimated sales volume is 65,000, 82,000, 108,000, 94,000, and 57,000 per year for the next five years, respectively. The unit price for the new PDA will be $500. The necessary equipment can be purchased for $32.5 million and will be depreciated on a seven year MACRS schedule. It is believed the value of the equipment in 5 five years will be $3.5 million.

Net working capital for the PDAs will be 20 percent of sales and will occur with the timing of the cash flows for the year. Changes in the Networking Capital will thus first occur in Year 1 with the first year sales. Conch Republic has a 35 percent corporate tax rate and a 12 percent required return.


4) What is the NPV of the project?
5) How sensitive is the NPV changes in the price of the new PDA?

Explanation / Answer

I found almost similar problem in the following link hope that helps

http://jpkc.jnu.edu.cn/2010/gsjr/ziliao/wgalk/No.9.swf

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