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 Personal Digital Assistant (PDA). Conch Republic currently has PDA model on the market and sales have been excellent. The PDA is a unique item in that it comes in a variety of tropical colors ad is preprogrammed to play Jimmy Buffett music. However as with any electronic item, technology changes rapidly, and the current PDA has limited features in comparison with newer models. 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 has spent a further $200,000 for a marketing study to determine the expected sales figures 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 of 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 five years will be $3.5 million. Net working capital for the PDAs will be 20% 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

Explanation / Answer

time

Cash flow

0

-20 500 000

1

2 942 908

2

8082 458

3

9763 408

4

9499258

5

14 276 270

Pay back period

= 2+(9474 634/9763408)=2.970 years

Profitability indxes=

= [2942908/1.12 +

(8080458/1.12^2 )

+(9763408/1.12^3)+

(9499258/1.12^4 )

+14276270/1.12^5] / 20 500 000] =1.471

IRR= 26.14%

NPV=9657971.10

time

Cash flow

0

-20 500 000

1

2 942 908

2

8082 458

3

9763 408

4

9499258

5

14 276 270

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