Conch Republic Electronics, Part 1 Conch Republic Electronics is a midsized electronics manu- the new PDA will be $340. The necessary equipment can facturer located in Key West, Florida. The company president be purchased for $16.5 million and will be depreciated on a is Shelley Couts, who inherited the company. When it was seven-year MACRS schedule. It is believed the value of the founded over 70 years ago, the company originally repaired equipment in five years will be $3.5 million. radios and other household appliances. Over the years, the As previously stated, Conch Republic currently manufaccompany expanded into manufacturing and is now a reputa- tures a PDA. Production of the existing model is expected to ble manufacturer of various electronic items. Jay McCanless, be terminated in two years. If Conch Republic does not introa recent MBA graduate, has been hired by the company's duce the new PDA, sales will be 80,000 units and 60,000 units finance department. for the next two years, respectively. The price of the existing One of the major revenue-producing items manufactured PDA is $280 per unit, with variable costs of $120 each and by Conch Republic is a personal digital assistant (PDA). fixed costs of $1,800,000 per year. If Conch Republic does Conch Republic currently has one PDA model on the mar- introduce the new PDA, sales of the existing PDA will fall ket, and sales have been excellent. The PDA is a unique item by 15,000 units per year, and the price of the existing units in that it comes in a variety of tropical colors and is prepro- will have to be lowered to $240 each. Net working capital grammed to play Jimmy Buffett music. However, as with any for the PDAs will be 20 percent of sales and will occur with electronic item, technology changes rapidly, and the current the timing of the cash flows for the year; for example, there PDA has limited features in comparison with newer models. is no initial outlay for NWC, but changes in NWC will first Conch Republic spent $750,000 to develop a prototype for a occur in year 1 with the first year's sales. Conch Republic new PDA that has all the features of the existing PDA but adds has a 35 percent corporate tax rate and a 12 percent required new features such as cell phone capability. The company has return. spent a further $200,000 for a marketing study to determine Shelly has asked Jay to prepare a report that answers the the expected sales figures for the new PDA. following questions: Conch Republic can manufacture the new PDA for $150 1. What is the payback period of the project? each in variable costs. Fixed costs for the operation are esti- 2 . What is the profitability index of the project? ume is 70,000,80,000,100,000,85,000, and 75,000 per each 3. What is the IRR of the project? year for the next five years, respectively. The unit price of 4. What is the NPV of the project? Please check the impact of the following situations on NPV and IRR of the project. 1. There will be 3 scenarios: Good, Normal (as in in the case) and Bad. a. In Good scenario, project sales volume will be 10% higher than expected. b. In Bad scenario, project sales volume will be 10% lower than expected. 2. There will be an increase in inflation. Inflation is expected to be 2% higher than expected