Conch Republic Electronics Conch Republic Electronics is a mid sized electronics

Question

Conch Republic Electronics

Conch Republic Electronics is a mid sized 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 expanded into manufacturing and is now a reputable manufacturer of various electronic items. Jay McCanless, a recent MBA graduate, has been hired by the company's finance department.

One of the major revenue-producing items manufactured by Conch Republic is a personal digital assistant (PDA). Conch Republic currently has one 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 and 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 developed a prototype for a new PDA that has all the features of the existing PDA but adds new features such as cell phone capability. The company has performed a marketing study to determine the expected sales figures for the new PDA.

Conch Republic can manufacture the new PDA for $200 each in variable costs. Fixed costs for the operation are estimated to run $4.5 million per year. The estimated sales volume is 70,000, 80,000, 100,000, 85,000, and 75,000 per each year for the next five years, respectively. The unit price of the new PDA will be $340. The necessary equipment can be purchased for $16.5 million and will be depreciated on a 5 year straight-line schedule.

Net working capital investment for the PDAs will be $6,000,000 the first year of operations. Of course NWC will be recovered at the projects end. Conch Republic has a 35 percent corporate tax rate and a 12 percent required return.

Shelly has asked Jay to prepare a report that answers the following questions:

What is the IRR of the project?

What is the NPV of the project, based on the required rate of return of 12%?

I think you will find an Excel spreadsheet to be the most effective way of completing this assignment.

Explanation / Answer

year0 year 1 year 2 year3 year4 year 5 initial cost -16500000 sales 70000 80000 100000 85000 75000 revenues 23800000 27200000 34000000 28900000 25500000 variable costs 14000000 16000000 20000000 17000000 15000000 fixed costs 4500000 4500000 4500000 4500000 4500000 EBITDA 5300000 6700000 9500000 7400000 6000000 Depriciation 3300000 3300000 3300000 3300000 3300000 EBIT 2000000 3400000 6200000 4100000 2700000 Taxes 700000 1190000 2170000 1435000 945000 Operating cash flow 4600000 5510000 7330000 5965000 5055000 NWC -6000000 6000000 CASH flow -22500000 4600000 5510000 7330000 5965000 11055000 IRR 13.99% NPV 1,280,799.57

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