1. How much is the discounted payback period for the new phone project in years?

2. What is the NPV of the project in the event that the economy is booming and Concha Electronics will sell more new phones at higher prices and more customers will buy their product? We know that The number of new phones to be sold is 10% higher for every single year, and price is $600, and lost sale of old phones increase by 20%.

3.What is the NPV of the project if Concha sell fewer phones, with new phone sales decreasing 40% every single year, price is $550, and lost sales of old phones decrease 20%?

4. For the following 5 years, it is predicted that a 40% chance of recession, 35% chance for stable economy, and 25% chance of economic boom. What is expected NPV of new phones considering the risks above?

Conch Republic Electronics is a midsized 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 smartphone. Conch Republic currently has one smartphone model on the market, and sales have been excellent. The smartphone 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 smartphone has limited features in comparison with newer models. Conch Republic spent $950,000 to develop a prototype for a new smartphone that has all the features of the existing smartphone but adds new features such as WiFi tethering. The company has spent a further $250,000 for a marketing study to determine the expected sales figures for the new smartphone. Conch Republic can manufacture the new smartphones for $245 each in variable costs. Fixed costs for the operation are estimated to run $6.9 million per year. The estimated sales volume is 160,000, 170,000, 130,000, 105,000, and 80,000 per year for the next five years, respectively. The unit price of the new smartphone will be $575. The necessary equipment can be purchased for $49.5 million and will be depreciated on a seven-year MACRS schedule. It is believed the value of the equipment in five years will be $6.8 million. As previously stated, Conch Republic currently manufactures a smartphone. Production of the existing model is expected to be terminated in two years. If Conch Republic does not introduce the new smartphone, sales will be 95,000 units and 65,000 units for the next two years, respectively. The price of the existing smartphone is $435 per unit, with variable costs of $155 each and fixed costs of $4.3 million per year. If Conch Republic does introduce the new smartphone, sales of the existing smartphone will fall by 30,000 units per year, and the price of the existing units will have to be lowered to $235 each. Net working capital for the smartphones will be 20 percent of sales and will occur with the timing of the cash flows for the year; for example, there is no initial outlay for NWC, but changes in NWC will first occur in Year I with the first year's sales. Conch Republic has a 21 percent corporate tax rate and a required return of 12 percent. Shelley has asked Jay to prepare a report that answers the following questions. Input Area: Equipment Salvage value R&D Marketing study $ 49,500,000 $ 6,800,000 $950,000 $ 250,000 Year 1 160,000 14.29% 95,000 30.000 Sales (units) Depreciation rate Sales of old phone (units) Lost sales (units) Year 2 170,000 24.49% 65,000 30.000 Year 3 130,000 17.49% Year 4 105,000 12.49% Year 5 80,000 8.93% Price of new phone Unit cost of new phone Fixed costs (per year) $ 575 $ 245 $ 6,900,000 Price of old phone Revised price of old phone Unit cost of old phone $ 435 $ 235 $ 155 Tax rate NWC percentage Required return 21% 20% 12% Output Area Old phone price reduction $ 200 Year 3 74,750.000 Year 4 60,375,000 Year 5 46,000,000 New phone sales Lost sales Lost rev. Net sales Year 1 92,000,000 (13,050,000) (13,000,000) $65,950,000 Sales Year 2 97,750,000 (13,050,000) (7,000,000) $71,700,000 $74,750,000 $60 375.000 $46,000,000 Year 3 31,850,000 Variable Costs (VC) Year 2 41,650,000 (4,650.000) $37,000,000 Year 4 25.725,000 Year 5 19,600,000 New phone costs Lost sales Net VC Year 1 39,200,000 (4,650,000) $34,550,000 $31,850,000 $25,725.000 $19.600.000 Net Sales Net Variable Costs Fixed costs Dep EBT Tax NI +Dep Operating Cash Flow Year 1 Year 2 Year 3 $65,950,000 $77,700,000 $74 750.000 34,550,000 37,000,000 31.850.000 6,900,000 6,900,000 6.900.000 7,073,550 12,122.550 8,657,550 $17.426,450 $21,677,450 $27.342,450 3,659,555 4,552.265 5,741,915 $13.766,896 $17,125,186 $21,600,536 71073,550 12,122550 8,657 550 Year 4 $60.375.000 25.725,000 6,900,000 6,182,550 $21,567,450 4,529,165 $17.038.286 6.182,550 Year 5 $46,000,000 19,600,000 6.900.000 4.420,350 $15,079,650 3,166,727 $11,912,924 4,420,350 G H D I 1=0 Beg NWC End NWC Changes in NWC Changes in Net Working Capital Year 1 Year 2 0 13190000 13,190,000 15.540,000 $13,190,000 $2.350.000 Year 3 15540000 14,950.000 ($590,000 Year 4 14950000 12,075,000 ($2,875,000) Year 5 12075000 0 ($12,075,000) Net Capital Spending Year 5 $ 11,043,450 BV of Equipment t=0 Year 1 Year 2 Year 3 Year 4 Year 5 49,500,000 Equipment ATSV Equipment Net Capital Spending 7,691,125 ($7,691,125) $49.500.000 SO $0 SO $0 Free Cash Flow 1=0 Year 1 20.840,446 Year 2 29.247,736 Year 3 30,258,086 Year 4 23,220,836 OCF - NCS Changes in NWC FCF (49.500.000) Year 5 16,333.274 7,691,125 12.075,000 $36.099,398 (13,190,000) $7.650,446 (2,350,000) $26,897,736 ($49.500,000) 590,000 S30,848,086 2,875.000 $26,095,836 Payback period PI IRR NPV 2.48 1.76 34.42% $37,798,666 10 New Conch Republic Electronics is a midsized 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 smartphone. Conch Republic currently has one smartphone model on the market, and sales have been excellent. The smartphone 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 smartphone has limited features in comparison with newer models. Conch Republic spent $950,000 to develop a prototype for a new smartphone that has all the features of the existing smartphone but adds new features such as WiFi tethering. The company has spent a further $250,000 for a marketing study to determine the expected sales figures for the new smartphone. Conch Republic can manufacture the new smartphones for $245 each in variable costs. Fixed costs for the operation are estimated to run $6.9 million per year. The estimated sales volume is 160,000, 170,000, 130,000, 105,000, and 80,000 per year for the next five years, respectively. The unit price of the new smartphone will be $575. The necessary equipment can be purchased for $49.5 million and will be depreciated on a seven-year MACRS schedule. It is believed the value of the equipment in five years will be $6.8 million. As previously stated, Conch Republic currently manufactures a smartphone. Production of the existing model is expected to be terminated in two years. If Conch Republic does not introduce the new smartphone, sales will be 95,000 units and 65,000 units for the next two years, respectively. The price of the existing smartphone is $435 per unit, with variable costs of $155 each and fixed costs of $4.3 million per year. If Conch Republic does introduce the new smartphone, sales of the existing smartphone will fall by 30,000 units per year, and the price of the existing units will have to be lowered to $235 each. Net working capital for the smartphones will be 20 percent of sales and will occur with the timing of the cash flows for the year; for example, there is no initial outlay for NWC, but changes in NWC will first occur in Year I with the first year's sales. Conch Republic has a 21 percent corporate tax rate and a required return of 12 percent. Shelley has asked Jay to prepare a report that answers the following questions. Input Area: Equipment Salvage value R&D Marketing study $ 49,500,000 $ 6,800,000 $950,000 $ 250,000 Year 1 160,000 14.29% 95,000 30.000 Sales (units) Depreciation rate Sales of old phone (units) Lost sales (units) Year 2 170,000 24.49% 65,000 30.000 Year 3 130,000 17.49% Year 4 105,000 12.49% Year 5 80,000 8.93% Price of new phone Unit cost of new phone Fixed costs (per year) $ 575 $ 245 $ 6,900,000 Price of old phone Revised price of old phone Unit cost of old phone $ 435 $ 235 $ 155 Tax rate NWC percentage Required return 21% 20% 12% Output Area Old phone price reduction $ 200 Year 3 74,750.000 Year 4 60,375,000 Year 5 46,000,000 New phone sales Lost sales Lost rev. Net sales Year 1 92,000,000 (13,050,000) (13,000,000) $65,950,000 Sales Year 2 97,750,000 (13,050,000) (7,000,000) $71,700,000 $74,750,000 $60 375.000 $46,000,000 Year 3 31,850,000 Variable Costs (VC) Year 2 41,650,000 (4,650.000) $37,000,000 Year 4 25.725,000 Year 5 19,600,000 New phone costs Lost sales Net VC Year 1 39,200,000 (4,650,000) $34,550,000 $31,850,000 $25,725.000 $19.600.000 Net Sales Net Variable Costs Fixed costs Dep EBT Tax NI +Dep Operating Cash Flow Year 1 Year 2 Year 3 $65,950,000 $77,700,000 $74 750.000 34,550,000 37,000,000 31.850.000 6,900,000 6,900,000 6.900.000 7,073,550 12,122.550 8,657,550 $17.426,450 $21,677,450 $27.342,450 3,659,555 4,552.265 5,741,915 $13.766,896 $17,125,186 $21,600,536 71073,550 12,122550 8,657 550 Year 4 $60.375.000 25.725,000 6,900,000 6,182,550 $21,567,450 4,529,165 $17.038.286 6.182,550 Year 5 $46,000,000 19,600,000 6.900.000 4.420,350 $15,079,650 3,166,727 $11,912,924 4,420,350 G H D I 1=0 Beg NWC End NWC Changes in NWC Changes in Net Working Capital Year 1 Year 2 0 13190000 13,190,000 15.540,000 $13,190,000 $2.350.000 Year 3 15540000 14,950.000 ($590,000 Year 4 14950000 12,075,000 ($2,875,000) Year 5 12075000 0 ($12,075,000) Net Capital Spending Year 5 $ 11,043,450 BV of Equipment t=0 Year 1 Year 2 Year 3 Year 4 Year 5 49,500,000 Equipment ATSV Equipment Net Capital Spending 7,691,125 ($7,691,125) $49.500.000 SO $0 SO $0 Free Cash Flow 1=0 Year 1 20.840,446 Year 2 29.247,736 Year 3 30,258,086 Year 4 23,220,836 OCF - NCS Changes in NWC FCF (49.500.000) Year 5 16,333.274 7,691,125 12.075,000 $36.099,398 (13,190,000) $7.650,446 (2,350,000) $26,897,736 ($49.500,000) 590,000 S30,848,086 2,875.000 $26,095,836 Payback period PI IRR NPV 2.48 1.76 34.42% $37,798,666 10 New