CHAPTER CASE CONCH REPUBLIC ELECTRONICS such as will tethenng. The company has spent a tur ther $200,000 for a marketing study to determine the expected sales figures for the new smart phone. och Republic Electronics is a midsized electron- is 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 over 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 com- pany in Its finance department. One of the major revenue-producing items manu- factured by Conch Republic is a smart phone. Conch Republic currently has one smart phone model on the market and sales have been excellent. The smart phone 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 smart phone has limited features in comparison with newer models. Conch Republic spent $750,000 to develop a prototype for a new smart phone that has all the features of the existing one but adds new features Conch Republic can manufacture the new smart phone for $199 each in variable costs. Fixed costs for the operation are estimated to run $5.5 Million per year. The estimated sales volume is 115,000, 115,000, 90,000, 75,000, and 54,000 per year for the next five years, respectively. The unit price of the new smart phone will be $485. The necessary equipment can be purchased for $60 Million and will be depreciated on a seven-year MACRS schedule. It is believed the value of the equipment in five years will be $6.25 Million. Net working capital for the smart phones will be 22 percent of sales and will occur with the time of 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 22 percent tax rate and a required return of 12 percent. Shelly has asked Jay to prepare a report that answer the following questions: QUESTIONS 1. What is the payback period of the project? 2. What is the profitability index of the project? 3. What is the IRR of the project? 4. What is the NPV of the project? 7. Should Conch Republic produce the new smart phone? 8. Suppose Conch Republic loses sales on other models because of the introduction of the new model and this afta n Million and will be deprecated on It is believed the value of the equipment in five years will be s Million. One of the major revenue-producing items manu- factured by Conch Republic is a smart phone. Conch Republlc currently has one smart phone model on the market and sales have been excellent. The smart phone 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 smart phone has limited features in comparison with newer models. Conch Republic spent $750,000 to develop a prototype for a new smart phone that has all the features of the existing one but adds new features Net working capital for the smart phones will be 22 percent of sales and will occur with the time of cash flows for year (i.e. there is no initial outlay for NWC). Changes in NWC thus first occur in Year 1 with the first year's sales. Conch Rep has a 22 percent tax rate and a required return of 12 percent. Shelly has asked Jay to prepare a report that answert following questions: QUESTIONS 1. What is the payback period of the project? 2. What is the profitability index of the project? 3. What is the IRR of the project? 4. What is the NPV of the project? 5. How sensitive is the NPV to changes in the price of the new smart phone? 6. How sensitive is the NPV to changes in the quan- tity sold? 7. Should Conch Republic produce the new smart phone? 8. Suppose Conch 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 nonch Republic Electronics Is a midsized electron les 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 over 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 com pany in its finance department, One of the major revenue-producing items manu- factured by Conch Republic is a smart phone. Conch Republlc currently has one smart phone model on the market and sales have been excellent. The smart phone 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 smart phone has limited features in comparison with newer models. Conch Republic spent $750,000 to develop a prototype for a new smart phone that has all the features of the existing one but adds new features such as wifi tethering. The col ther $200,000 for a marketing expected sales figures for the Conch Republic can manufac each in variable costs. Fixed to run $5.5 Million per year. 115,000, 115,000, 90,000, 73 five years, respectively. The be $485. The necessary equi Million and will be deprecia It is believed the value of Million. Net working capita percent of sales and will o year (i.e. there is no initial thus first occur in Year 1 w has a 22 percent tax rate a Shelly has asked following questions: QUESTIONS 1. What is the navbank marad of the most CS suoh as wifi tethering. The company has spent a tur- ther $200,000 for a marketing study to determine the expected sales figures for the new smart phone. Conch Republic can manufacture the new smart phone for $199 each in variable costs. Fixed costs for the operation are estimated to run $5.5 Million per year. The estimated sales volume is 115,000, 115,000, 90,000, 75,000, and 54,000 per year for the next five years, respectively. The unit price of the new smart phone will be $485. The necessary equipment can be purchased for $60 Million and will be depreciated on a seven-year MACRS schedule. It is believed the value of the equipment in five years wil be $6.25 Million. Net working capital for the smart phones will be 22 percent of sales and will occur with the time of 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 22 percent tax rate and a required return of 12 percent. Shelly has asked lay to prepare a report that answer the following questions: Hels. Conch Republic spent $750,000 to develop ototype for a new smart phone that has all the ures of the existing one but adds new features following 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 smart phone? How sensitive is the NPV to changes in the quan- tity sold? 7. Shoule phone 8. Suppg model model has a 22 percent tax rat brogy tayo ay UI UTILE has limited features in comparison with newer s. Conch Republic spent $750,000 to develop btype for a new smart phone that has all the is of the existing one but adds new features Shelly has aske following questions: UESTIONS hat is the payback period of the project? hat is the profitability Index of the project? sat is the IRR of the project? lat is the NPV of the project? w sensitive is the NPV to changes in the price he new smart phone? w sensitive is the NPV to changes in the quan 7. Should Conch Rep phone? 8. Suppose Conch F models becaused model. How would sold? 7. Should Conch Republic produce the new smart phone? 8. Suppose Conch Republic loses sales on other models because of the introduction of the new model. How would this affect your analysis