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

companys 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

years sales. Conch Republic has a 21 percent corporate tax rate and a required

return of 12 percent.

Fill in the provided spreadsheet

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