Conch Republic Electries locates in Key West, Florida. The President is Shelley

Question

Conch Republic Electries 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 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. 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 company 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

Explanation / Answer

Case #1 : WORKING NOTES:

1. Calculating PAT:

2. Calculating annual cash Flows:

3. Calculating Working Capital Changes:

4. Calculating annual depreciation:

5. Calculating sale price (net of tax)

MAIN SOLUTION:

a. Payback Period:

payback period = 2 + (7025455/9075048) = 2.77 years

b. Profitability Index:

PI = 26,398,873/ Initial Investment = 26,398,873/16,500,000 = 1.60

c. IRR:

-16,500,000 = 1785248/(1+IRR)1+7689298/(1+IRR)2+9075048/(1+IRR)3+9313798/(1+IRR)4+11096610/(1+IRR)5

IRR=29.50%

d. NPV:

NPV = -16,500,000+ 1785248/(1.12)1+7689298/(1.12)2+9075048/(1.12)3+9313798/(1.12)4+11096610/(1.12)5

NPV = $9,898,873

Case #2, WORKING NOTES:

a. calculation of PAT:

Year 1: (70000*340) - (15000*280) -[(80000-15000)*(280-240)]= $17,000,000

Year 2: (80000*340) - (15000*280) -[(60000-15000)*(280-240)]= $21,200,000

2. Calculation of Cash Flows:

3. Calculation of W. Cap changes:

MAIN SOLUTION:

a. IRR:

-16,500,000 = -104753/(1+IRR)1+4799298/(1+IRR)2+7875048/(1+IRR)3+9313798/(1+IRR)4+11096610/(1+IRR)5

IRR=20.51%

b. NPV:

NPV = -16,500,000-104753/(1.12)1+4799298/(1.12)2+7875048/(1.12)3+9313798/(1.12)4+11096610/(1.12)5

NPV = $5,053,346

Year 0 1 2 3 4 5 Sales (SP*units) 23,800,000 27,200,000 34,000,000 28,900,000 25,500,000 Less: V.Costs (VC*units) (10,500,000) (12,000,000) (15,000,000) (12,750,000) (11,250,000) Less: F.Costs (4,500,000) (4,500,000) (4,500,000) (4,500,000) (4,500,000) Less: Depreciation (2,357,850) (4,040,850) (2,885,850) (2,060,850) (1,473,450) PBT 6,442,150 6,659,150 11,614,150 9,589,150 8,276,550 Less: Tax @ 35% (2,254,753) (2,330,703) (4,064,953) (3,356,203) (2,896,793) PAT 4,187,398 4,328,448 7,549,198 6,232,948 5,379,758

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