Answer all parts of the case (i.e. payback, PI, IRR and NPV). Comments and hints:

a. Develop one spreadsheet model and formulas that will automatically adjust and recalculate all the cash flows separately if sales price changes or sales volume changes for the new smartphone. 

 

b. Think "incremental". Make sure your project cash flows recognize the replacement of the current smartphone.

c. A reminder than sunk costs are not incremental, but they are also in a sense costs of the project.

d. For net working capital, first build in the working capital associated with the initial sales volume of the new smartphone, but in subsequent years only "changes" in working capital balances are cash outflows or inflows. Don't forget working capital recapture.

e. It is intended that the $4.3M in fixed costs associated with the old smartphone are borne whether or not the new project is accepted.

f. Don't forget the "terminal value" associated with the resale of the new equipment in five years as well as any tax implications.

Conch Republic Electronics, Part 2

a. A good spreadsheet model to automatically recalculate cash flows will make it easy to respond to #1 and #2 in Part 2 of this case. Review your spreadsheet model to make sure it is "ready to go".

b. In order to respond to #1, assume that one downside standard deviation of price is $75 and that you want to evaluate the impact of one standard deviation and two standard deviation price reductions.

c. To respond to #2, assume that one downside standard deviation of sales volume (quantity sold) is 20% in relation to the base case of forecasted sales volume applied in Part 1. Evaluate the impact on one and two standard deviation reductions in sales volume.

d. This is an added #3. Assess the impact of changes in discount rates on NPV under the rationale that the risks associated with the economy are greater than anticipated. Present an NPV profile graph using the "base case" from Part 1.

e. Based on all of your analysis above, assess and support your analysis of risk associated with this project and whether it impacts your recommendation in the Part 1 minicase.