Case #2 Conch Republic Electrics locates in Key West, Florida. The President is

Question

Case #2 Conch Republic Electrics locates in Key West, Florida. The President is Shelley Couts, who inherited the company. The company is a reputable manufacturer of various electronic items. Jay McCanless, a recent Business graduate, has been hired by the company's finance department. One of the major revenue producing items manudactured by Conch Repubilicis a Personal Diital Assistant, PDA. Conch Republic currently has one PDA model on the market, and sales have been excellent. However, as with any electronic item, technology changes rapidly, and the current PDA has limited features in comparison with newer models. Conch spent $750000 to develop a prototype for a new PDA that has all the features of existing PDA but adds newer features which market demands. The cómpany has spent a further $200000 for a marketing and sale promotion. Conch republic manufactures the new PDA for $150 each in variables costs. Fixed costs for the operation are estimated to run $4.5 million per year. The estimate sale volume is 70000, 80000, 100000, 85000, and 75000 per each year for the next four 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 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. Conch Republic has a 35% tax rate and 12% required return. Shelley has asked jay to prepare a report that answers the following questions: What is the payback period of the new project? (10%) What is the profitability index of the new project? (10%) what is the IRR of the new project? (10%) What is the NPV of the new project? (10%) Challenge Part of Case #2 Production of the existing model is expected to be terminated in two years, if Conch introduce the new PDA, sales will be 80000 units and 60000 units for the next two years respectively republic does not The price of the existing PDA is $ 280 per unit, with variable costs of $120 each and fixed costs of $1800000 per year. If Conch Republic dose introduce the new PDA, sales of the existing POA will all by 15000 units per year, and the price will have to be lowered to $240 each. Consider this change of

Explanation / Answer

Answer: Case # 2

Part 1:

Assumptions:

1. Double Declining Method of Depreciation with Depreciation rate as 28.5714%.

2.R & D is expensed in the first year. Not considered for future years.

3. Marketing & Promotion expensed at the same rate for all the years.

4. Capital Expenditure is funded through internal equity rather than external debt.

5. We have considered R & D Cost and Marketing and Promotion expenditure as a sperate operating cost than $ 4.5 million per year fixed operating costs.

a. NPV: $ 2,490,355

b. IRR: 16%

c. Payback Period: 1.50 years.

d. Profitability Index: 1.15.

Case # 2 Challenge Part.

Suppose the new project has been considered.

1. Sales droping by 15000 per year in each of the next two years.

2. NPV of the new project: $ 7,356,438.

3. IRR: 22%.

4. In the 7th year, we have switched to Straight Line Method of Depreciation From MACRS Schedule.

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