CHAPTER CASE Conch Republic Electronics C. onch Republic Electronics is a midsized electronics manufacturer located in Key West Florida. The com many president is Shelly Couts, who inherited the com any. The company originally repaired radios and other usehold appliances when it was founded more than years ago. Over the years, the company has ex nded, and it is now a reputable manufacturer of vari- specialty electronic items. Jay McCanless, a recent graduate, has been hired by the company in its fi- e department One of the major revenue-producing items manu- ed by Conch Republic is a smartphone. Conch Re- currently has one smartphone model on the and sales have been excellent. The smartphone Fue item in that it comes in a variety of tropical od is preprogrammed to play Jimmy Buffett mu- rever, as with any electronic Item, technology rapidly, and the current smartphone has limited 7 comparison with newer models. Conch Re- ent $1.2 million to develop a prototype for a Shone that has all the features of the existing 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 smart phone for $210 each in variable costs. Fixed costs for the operation are estimated to run $5.3 million per year. The estimated sales volumes are 64,000, 106,000 87,000, 78,000, and 54,000 per year for each of the next five years, respectively. The unit price of the new smartphone will be $515. The necessary equipment can be purchased for $38.5 million and will be deprech- ated on a seven-year MACRS schedule. It is believed the value of the equipment in five years will be $5.8 million. 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 (i.e., there is no initial outlay for NWC). Changes in NWC thus will occur first in Year 1 with the first year's sales. Conch Republic has a 22 percent corporate tax rate and a required return of 12 percent. Shelly has asked Jay to prepare a report that 6. How sensitive is the NPV to changes in the quan 7. Should Conch Republic produce the new onch Republic loses sales on other models because of the introduction of the new model, How would this affect your analysis? CHAPTER CASE Conch Republic Electronics Car anch Republic Electronics is a midsized electronics company has spent a further $250,000 for a marketing manufacturer located in Key West, Florida. The com study to determine the expected sales figures for the Dany president is Shelly Couts, who inherited the com new smartphone pany. The company originally repaired radios and other Conch Republic can manufacture the new smart- household appliances when it was founded more than phone for $210 each in variable costs. Fixed costs for 70 years ago. Over the years, the company has ex the operation are estimated to run $5.3 million per panded, and it is now a reputable manufacturer of var year. The estimated sales volumes are 64,000, 106.000, bus specialty electronie items. Jay McCanless, a recent 87,000, 78,000, and 54,000 per year for each of the MBA graduate has been hired by the company in its nance department next five years, respectively. The unit price of the new smartphone will be $515. The necessary equipment One of the major revenue producing items manu can be purchased for $38.5 million and will be depreci- factured by Conch Republic is a smartphone. Conch Re ated on a seven-year MACRS schedule. It is believed puble currently has one smartphone model on the the value of the equipment in five years will be 55,8 market and sales have been excellent. The smartphone million Is a unique item in that it comes in a variety of tropical Net working capital for the smartphones will be colors and is preprogrammed to play Jimmy Buffett mu- 20 percent of sales and will occur with the timing of the sic. However, as with any electronic Item, technology cash flows for the year e, there is no Initial outlay for changes rapidly, and the current smartphone has limited NWC). Changes in NWC thus will occur first in Year 1 with features in comparison with newer models. Conch Re: the first year's sales, Conch Republic has a 22 percent public spent $12 million to develop a prototype for a corporate tax rate and a required return of 12 percent new smartphone that has all the features of the existing Shelly has asked Jay to prepare a report that one but adds new features such as win tethering. The answers the following questions: QUESTIONS 1. What is the payback period of the project? 2. What is the profitability Index of the project? tity sold? 3. What is the IRR of the project? 4. What is the NPV of the project? smartphone? 5. How sensitive is the NPV to changes in the price 8. Suppose of the new smartphone