conch

Conch Republic Electronics is a midsized electronics manufacturer located in Key West, Florida. The company president is Shelley Couts, who inherited the company. When it was founded over $70$ years ago, the company originally repaired radios and other household appliances. Over the years, the company expanded into manufacturing and is now a reputable manufacturer of various electronic items. Jay McCanless, a recent MBA graduate, has been hired by the company's 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 $$950,000$ to develop a prototype for a new smartphone that has all the features of the existing smartphone but adds new features such as WiFi tethering. The company has spent a further $$250,000$ for a marketing study to determine the expected sales figures for the new smartphone.

Conch Republic can manufacture the new smartphones for $$245$ each in variable costs. Fixed costs for the operation are estimated to run $$6\mathrm{.}9$ million per year. The estimated sales volume is $160,000,170,000,130,000,105,000,$ and $80,000$ per year for the next five years, respectively. The unit price of the new smartphone will be $$575.$ The necessary equipment can

be purchased for $$49\mathrm{.}5$ million and will be depreciated or seven$-$year MACRS schedule. It is believed the value of equipment in five years will be $$6\mathrm{.}8$ million.

As previously stated, Conch Republic currently ma factures a smartphone. Production of the existing model expected to be terminated in two years. If Conch Repul does not introduce the new smartphone, sales will be $95,$ units and $65,000$ units for the next two years, respectively. price of the existing smartphone is $$435$ per unit, with vari costs of $$155$ each and fixed costs of $$4\mathrm{.}3$ million per y If Conch Republic does introduce the new smartphone, of the existing smartphone will fall by $30,000$ units per and the price of the existing units will have to be lowere $$235$ each. Net working capital for the smartphones wi $20$ percent of sales and will occur with the timing of the flows for the year; for example, there is no initial outla NWC$,$ but changes in NWC will first occur in Year $1$ wit first year's sales. Conch Republic has a $21$ percent corp tax rate and a required return of $12$ percent.

Shelley has asked Jay to prepare a report that answe 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?