Conch Republic Electronics is a midsized electronics manufacturer located in Key
ID: 2703831 • Letter: C
Question
Conch Republic Electronics is a midsized electronics manufacturer located in Key West, Florida. The company president is Shelly Couts, who inherited the company. The company originally repaired radios and other household appliances when it was founded over 70 years ago. Over the years, the company has expanded, and it is now a reputable manufacturer of various specialty electronic items. Jay McCanless, a recent MBA graduate, had been hired by the company in its finance department.
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. The 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 one 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 phone for $205 each in variable costs. Fixed costs for the operation are estimated to run $5.1 million per year. The estimated sales volume is 64,000, 106,000, 87,000, 78,000, and 54,000 per year for the next five years, respectively. The unit price of the new smart phone will be $485. The necessary equipment can be purchased for $34.5 million and will be depreciated on a seven-year MACRS schedule. It is believed the value of the equipment in five years will be $5.5 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
Explanation / Answer
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
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