Conch Republic Electronics Case

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 $1.5 million 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 $210 each in variable costs. Fixed costs for the operation are estimated to run $5.4 million per year. The estimated sales volume is 67,000, 108,000, 93,000, 86,000, and 55,000 per year for the next five years, respectively. The unit price of the new smartphone will be $525. The necessary equipment can be purchased for $41.5 million and will be depreciated on a seven-year @ MACRS schedule. It is believed the value of the equipment in five years will be $5.9 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; for example, there is no initial outlay for NWC. but changes in NW will first occur in Year I with the first year's sales. Conch Republic has a 22 percent corporate tax rate and a required return of 12 percent. Shelley has asked Jay to prepare a report that answers the following 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 NVP to changes in the price of the new smartphone?

6.How sensitive is the NVP to changes in the quantity sold?

7.Should Conch Republic produce the new smartphone?

8.Suppose Conch Republic loses sales on the other models because of the introduction of the new model.How would this affect your analysis?