Question
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
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 $750,000 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
$200,000 for a marketing study to determine the expected sales figures for the new
smartphone.Conch Republic can manufacture the new smartphones for $220 each in variable costs.
Fixed costs for the operation are estimated to run $6.4 million per year. The estimated sales
volume is 155,000, 165,000, 125,000, 95,000, and 75,000 per year for the next five years,
respectively. The unit price of the new smartphone will be $535. The necessary equipment
can be purchased for $43.5 million and will be depreciated on a seven-year MACRS
schedule. It is believed the value of the equipment in five years will be $6.5 million.
As previously stated, Conch Republic currently manufactures a smartphone. Production of
the existing model is expected to be terminated in two years. If Conch Republic does not
introduce the new smartphone, sales will be 95,000 units and 65,000 units for the next two
years, respectively. The price of the existing smartphone is $385 per unit, with variable
costs of $145 each and fixed costs of $4.3 million per year. If Conch Republic does
introduce the new smartphone, sales of the existing smartphone will fall by 30,000 units per
year, and the price of the existing units will have to be lowered to $215 each. 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
NWC will first occur in Year 1 with the first year's sales. Conch Republic has a 21 percent
corporate tax rate and a required return of 12 percent.Shelley has asked Jay to have report that answers 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?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started