Chapter Case

Conch Republic Electronics

Conch Republic Electronics is a midsized electronics manufacturer located in Key West, Florida. The company president

is Shelly Couts, who inherited the company. The company originally repaired radios and other household appliances

when it was founded more than $70$ years ago. Over the years, the company has expanded, and it is now a reputable

manufacturer of various specialty electronic items. Jay McCanless, a recent MBA graduate, has been hired by the

company in its 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 $$1\mathrm{.}5$ million to develop a prototype for a new smartphone that has all the features of the existing

one but adds new features such as Wi$-$Fi 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 smartphone for $$210$ each in variable costs. Fixed costs for the operation are

estimated to run $$5\mathrm{.}4$ million per year. The estimated sales volumes are $67,000,108,000,93,000,86,000,$ and $55,000$

per year for each of the next five years, respectively. The unit price of the new smartphone will be $$525.$ The necessary

equipment can be purchased for $$41\mathrm{.}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 $$5\mathrm{.}9$ 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 answers the following questions:

QUESTIONS

What is the payback period of the project?

What is the profitability index of the project?

What is the IRR of the project?

What is the NPV of the project?

How sensitive is the NPV to changes in the price of the new smartphone?

How sensitive is the NPV to changes in the quantity sold?

Should Conch Republic produce the new smartphone?

Suppose Conch Republic loses sales on other models because of the introduction of the new model. How would this

affect your analysis?