1. How sensitive is the NPV to a change in price?

2. How sensitive is the NPV to a change in quantity?

Question: ***Excel Spreadsheet" ** Conch Republic Equestions and answers / ***excel spreadsheet*** conch republic electronics midsized electronics manufacturer located ***Excel Spreadsheet*** Conch Republic Electronics is a midsized electronics manufacturer located in Key West, Florida. The company president is Shelley Couts, who inherited the company. Over the years, the company expanded into manufacturing and is now a reputable manufacturer of various electronic items. 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. Conch republic spent $750,000 to develop a prototype for a new smart phone that has all the features of their existing smart phones. 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 phones for $220 each in variable costs. Fixed costs for the operation are estimated to run $6.4 million per year. The estimated sales volume is 155,000, 165,000, 125,000, 95,000, and 75,000 per year for the next five years, respectively. The unit price of the new smart phone will be $535. The necessary equipment can be purchased for $43.5 million and will be depreciated on a seven-year MACRS schedule. It is believed the value of the equipment in five years will be $6.5 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 smart phone is $385 per unit; with variable cost of $145 and fixed costs of $4.3 million per year. If Conch Republic does introduce the new smartphone, sales of the existing smart phone will fall by 30,000 per unit, and the price of the existing units will have to be lowered to $215 each. 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's sales. Conch republic has a 21 percent corporate tax rate and a required rate of 12 percent. A. What is the payback period of the project? B. What is the profitability index of the project? C. What is the IRR of the project? D. What is the NPV of the project? 155000 82925000 34100000 6400000 14.29 6216150 36208850 165000 88275000 36300000 6400000 24.49 10653150 34921850 125000 66875000 27500000 6400000 17.49 7608150 25366850 95000 50825000 20900000 6400000 12.49 5433150 18091850 75000 40125000 16500000 6400000 8.93 3884550 13340450 Sales in units of new smart phone Sales revenue ($535) Variable cost ($220) Fixed cost (except depreciation) Depreciation Depreciation expense EBIT Contribution lost on existing smart phone Sales in units without new phone Contribution margin @ $240 Sales in units with new phone Contribution margin @70 Loss in contribution with new phone INCREMENTAL EBIT Tax @ 0.21 NOPAT (+) Depreciation OCF Capital expenditure Change in NWC Release on NWC After tax salvage value After tax annual cash flows 95000 65000 22800000 15600000 65000 35000 4550000 2450000 18250000 13150000 17958850 21771850 25366850 18091850 13340450 3771358.5 4572088.5 5327038.5 3799288.5 2801494.5 14187491.5 17199761.5 20039811.5 14292561.5 10538955.5 6216150 10653150 7608150 5433150 3884550 20403641.5 27852911.5 27647961.5 19725711.5 14423505.5 43,500,000 1,658,500 1070000 -4280000 -3210000 -2140000 89025000 7173019 31761524 -43,500,000 3818642 26782912 31927962 22935712 1) PAYBACK PERIOD 2.40398592 Years 2) PVIF @ 12% PV 1 0.89285714 0.79719388 0.71178025 0.63551808 0.56742686 3409501 21351173 22725692 14576059 18022342 1.84102913 PI 3) IRR PVIF @ 36% PV PVIF @ 37% PV 1 0.73529412 0.54065744 0.39754223 0.29231047 0.21493417 -43500000 2807825 14587642 12881450 6854440 7031166 1 0.72992701 0.53279344 0.38890032 0.28386885 0.20720354 -43500000 2787330 14269759 12416794 6510734 6581100 IRR 41.4927674 NPV 36,584,767 MINICASE CONCH REPUBLIC ELECTRONICS, PART 2 Shelley Couts, the owner of Conch Republic Electronics, has received the capital budgeting analysis from Jay McCanless for the new smartphone the company is considering. Shelley is pleased with the results, but she still has concerns about the new smartphone. Conch Republic has used a small market research firm for the past 20 years, but recently the founder of that firm has retired. Because of this, Shelley is not convinced the sales projections presented by the market research firm are entirely accurate. Additionally, because of rapid changes in technology, she is concerned that a competitor may enter the market. This would likely force Conch Republic to lower the sales price of its new smartphone. For these reasons, she has asked Jay to analyze how changes in the price of the new smartphone and changes in the quantity sold will affect the NPV of the project. Shelley has asked Jay to prepare a memo answering the following questions. QUESTIONS 1. How sensitive is the NPV to changes in the price of the new smartphone? 2. How sensitive is the NPV to changes in the quantity sold of the new smartphone? Question: ***Excel Spreadsheet" ** Conch Republic Equestions and answers / ***excel spreadsheet*** conch republic electronics midsized electronics manufacturer located ***Excel Spreadsheet*** Conch Republic Electronics is a midsized electronics manufacturer located in Key West, Florida. The company president is Shelley Couts, who inherited the company. Over the years, the company expanded into manufacturing and is now a reputable manufacturer of various electronic items. 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. Conch republic spent $750,000 to develop a prototype for a new smart phone that has all the features of their existing smart phones. 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 phones for $220 each in variable costs. Fixed costs for the operation are estimated to run $6.4 million per year. The estimated sales volume is 155,000, 165,000, 125,000, 95,000, and 75,000 per year for the next five years, respectively. The unit price of the new smart phone will be $535. The necessary equipment can be purchased for $43.5 million and will be depreciated on a seven-year MACRS schedule. It is believed the value of the equipment in five years will be $6.5 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 smart phone is $385 per unit; with variable cost of $145 and fixed costs of $4.3 million per year. If Conch Republic does introduce the new smartphone, sales of the existing smart phone will fall by 30,000 per unit, and the price of the existing units will have to be lowered to $215 each. 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's sales. Conch republic has a 21 percent corporate tax rate and a required rate of 12 percent. A. What is the payback period of the project? B. What is the profitability index of the project? C. What is the IRR of the project? D. What is the NPV of the project? 155000 82925000 34100000 6400000 14.29 6216150 36208850 165000 88275000 36300000 6400000 24.49 10653150 34921850 125000 66875000 27500000 6400000 17.49 7608150 25366850 95000 50825000 20900000 6400000 12.49 5433150 18091850 75000 40125000 16500000 6400000 8.93 3884550 13340450 Sales in units of new smart phone Sales revenue ($535) Variable cost ($220) Fixed cost (except depreciation) Depreciation Depreciation expense EBIT Contribution lost on existing smart phone Sales in units without new phone Contribution margin @ $240 Sales in units with new phone Contribution margin @70 Loss in contribution with new phone INCREMENTAL EBIT Tax @ 0.21 NOPAT (+) Depreciation OCF Capital expenditure Change in NWC Release on NWC After tax salvage value After tax annual cash flows 95000 65000 22800000 15600000 65000 35000 4550000 2450000 18250000 13150000 17958850 21771850 25366850 18091850 13340450 3771358.5 4572088.5 5327038.5 3799288.5 2801494.5 14187491.5 17199761.5 20039811.5 14292561.5 10538955.5 6216150 10653150 7608150 5433150 3884550 20403641.5 27852911.5 27647961.5 19725711.5 14423505.5 43,500,000 1,658,500 1070000 -4280000 -3210000 -2140000 89025000 7173019 31761524 -43,500,000 3818642 26782912 31927962 22935712 1) PAYBACK PERIOD 2.40398592 Years 2) PVIF @ 12% PV 1 0.89285714 0.79719388 0.71178025 0.63551808 0.56742686 3409501 21351173 22725692 14576059 18022342 1.84102913 PI 3) IRR PVIF @ 36% PV PVIF @ 37% PV 1 0.73529412 0.54065744 0.39754223 0.29231047 0.21493417 -43500000 2807825 14587642 12881450 6854440 7031166 1 0.72992701 0.53279344 0.38890032 0.28386885 0.20720354 -43500000 2787330 14269759 12416794 6510734 6581100 IRR 41.4927674 NPV 36,584,767 MINICASE CONCH REPUBLIC ELECTRONICS, PART 2 Shelley Couts, the owner of Conch Republic Electronics, has received the capital budgeting analysis from Jay McCanless for the new smartphone the company is considering. Shelley is pleased with the results, but she still has concerns about the new smartphone. Conch Republic has used a small market research firm for the past 20 years, but recently the founder of that firm has retired. Because of this, Shelley is not convinced the sales projections presented by the market research firm are entirely accurate. Additionally, because of rapid changes in technology, she is concerned that a competitor may enter the market. This would likely force Conch Republic to lower the sales price of its new smartphone. For these reasons, she has asked Jay to analyze how changes in the price of the new smartphone and changes in the quantity sold will affect the NPV of the project. Shelley has asked Jay to prepare a memo answering the following questions. QUESTIONS 1. How sensitive is the NPV to changes in the price of the new smartphone? 2. How sensitive is the NPV to changes in the quantity sold of the new smartphone