Conch Republic Electronics is a midsized electronics manu- be purchased for $49.5 million and will be depreciated on a facturer located in Key West, Florida. The company president seven-year MACRS schedule. It is believed the value of the is Shelley Couts, who inherited the company. When it was equipment in five years will be $6.8 million. founded over 70 years ago, the company originally repaired As previously stated, Conch Republic currently manuradios and other household appliances. Over the years, the factures a smartphone. Production of the existing model is company expanded into manufacturing and is now a reputa- expected to be terminated in two years. If Conch Republic ble manufacturer of various electronic items. Jay McCanless, a does not introduce the new smartphone, sales will be 95,000 recent MBA graduate, has been hired by the company's finance units and 65,000 units for the next two years, respectively. The department. price of the existing smartphone is $435 per unit, with variable One of the major revenue-producing items manufactured costs of $155 each and fixed costs of $4.3 million per year. by Conch Republic is a smartphone. Conch Republic currently If Conch Republic does introduce the new smartphone, sales has one smartphone model on the market, and sales have been of the existing smartphone will fall by 30,000 units per year, excellent. The smartphone is a unique item in that it comes in a and the price of the existing units will have to be lowered to variety of tropical colors and is preprogrammed to play Jimmy $235 each. Net working capital for the smartphones will be Buffett music. However, as with any electronic item, technol- 20 percent of sales and will occur with the timing of the cash ogy changes rapidly, and the current smartphone has limited flows for the year; for example, there is no initial outlay for features in comparison with newer models. Conch Republic NWC, but changes in NWC will first occur in Year 1 with the spent $950,000 to develop a prototype for a new smartphone first year's sales. Conch Republic has a 21 percent corporate that has all the features of the existing smartphone but adds tax rate and a required return of 12 percent. new features such as WiFi tethering. The company has spent Shelley has asked Jay to prepare a report that answers the a further $250,000 for a marketing study to determine the following questions. expected sales figures for the new smartphone. Conch Republic can manufacture the new smartphones for QUESTIONS $245 each in variable costs. Fixed costs for the operation are 1. What is the payback period of the project? estimated to run $6.9 million per year. The estimated sales volume is 160,000,170,000,130,000,105,000, and 80,000 per 2. What is the profitability index of the project? year for the next five years, respectively. The unit price of the 3. What is the IRR of the project? new smartphone will be $575. The necessary equipment can 4. What is the NPV of the project? Conch Republic Electronics is a midsized electronics manu- be purchased for $49.5 million and will be depreciated on a facturer located in Key West, Florida. The company president seven-year MACRS schedule. It is believed the value of the is Shelley Couts, who inherited the company. When it was equipment in five years will be $6.8 million. founded over 70 years ago, the company originally repaired As previously stated, Conch Republic currently manuradios and other household appliances. Over the years, the factures a smartphone. Production of the existing model is company expanded into manufacturing and is now a reputa- expected to be terminated in two years. If Conch Republic ble manufacturer of various electronic items. Jay McCanless, a does not introduce the new smartphone, sales will be 95,000 recent MBA graduate, has been hired by the company's finance units and 65,000 units for the next two years, respectively. The department. price of the existing smartphone is $435 per unit, with variable One of the major revenue-producing items manufactured costs of $155 each and fixed costs of $4.3 million per year. by Conch Republic is a smartphone. Conch Republic currently If Conch Republic does introduce the new smartphone, sales has one smartphone model on the market, and sales have been of the existing smartphone will fall by 30,000 units per year, excellent. The smartphone is a unique item in that it comes in a and the price of the existing units will have to be lowered to variety of tropical colors and is preprogrammed to play Jimmy $235 each. Net working capital for the smartphones will be Buffett music. However, as with any electronic item, technol- 20 percent of sales and will occur with the timing of the cash ogy changes rapidly, and the current smartphone has limited flows for the year; for example, there is no initial outlay for features in comparison with newer models. Conch Republic NWC, but changes in NWC will first occur in Year 1 with the spent $950,000 to develop a prototype for a new smartphone first year's sales. Conch Republic has a 21 percent corporate that has all the features of the existing smartphone but adds tax rate and a required return of 12 percent. new features such as WiFi tethering. The company has spent Shelley has asked Jay to prepare a report that answers the a further $250,000 for a marketing study to determine the following questions. expected sales figures for the new smartphone. Conch Republic can manufacture the new smartphones for QUESTIONS $245 each in variable costs. Fixed costs for the operation are 1. What is the payback period of the project? estimated to run $6.9 million per year. The estimated sales volume is 160,000,170,000,130,000,105,000, and 80,000 per 2. What is the profitability index of the project? year for the next five years, respectively. The unit price of the 3. What is the IRR of the project? new smartphone will be $575. The necessary equipment can 4. What is the NPV of the project