Coral Bay Electronics is a midsized electronics manufacturer located in St$.$ Louis,

Missouri. 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. Joe Hanks, a recent MBA graduate, has been hired by the company$$s finance department. One of the major revenue$-$producing items manufactured by Coral Bay Electronics is the fitness tracker. Coral Bay Electronics currently has a fitness tracker model on the market, and sales have been excellent. However, as with any electronic item, technology changes rapidly, and the current fitness tracker has limited features compared to newer models from its competitors. Coral Bay Electronics spent $$750,000$ to develop a prototype for a new generation fitness tracker that has all the features of the existing model but adds new features such as an ECG monitor, GPS tracking, and heart rate monitoring. The company has spent a further $$250,000$ on a marketing study to determine the expected sales figures for the new fitness tracker. Coral Bay Electronics can manufacture the new fitness tracker for $$100$ each in variable costs. Fixed costs for the new operation are estimated to be $$2\mathrm{.}5$ million annually. The estimated sales volume is $75,000,95,000,100,000,115,000,$ and $80,000$ per year for the next five years. The unit price of the new fitness tracker will be $$220$ for the first three years, and it will drop to $$175$ in year $4$ and year $5.$ The necessary equipment can be purchased for $$7\mathrm{.}5$ million and will be depreciated on a seven$-$year MACRS schedule $($see table below$).$ It is believed the value of the equipment in five years will be $$1\mathrm{.}5$ million.

As previously stated, Coral Bay Electronics currently manufactures fitness trackers.

Production of the existing model is expected to be terminated in two years. If Coral Bay Electronics does not introduce the new fitness tracker, sales will be $60,000$ units and $50,000$ units for the next two years, respectively. The price of the existing fitness tracker is $$185$ per unit, with variable costs of $ $90$ each and fixed costs of $$1,800,000$ per year. If Coral Bay Electronics does introduce the new fitness tracker, sales of the existing fitness tracker are expected to fall by $25,000$ units in year $1$ and $35,000$ in year $2,$ and the price of the existing units is expected to be lowered to $$120$ for each unit. Net working capital $($NWC$)$ for the new fitness tracker will be $28\%$ of sales and will occur with the timing of the cash flows for the year; for example, there is no initial outlay for NWC$,$ but changes in NWC will first happen at the year $1$ with the first year$$s sales. The total investment in NWC is expected to be fully recovered when the project ends. Coral Bay Electronics has a $20\%$ corporate tax rate and a $15\%$ required return.

$1.$ Will you include $$750,000$ in development spending and $$250,000$ in marketing

study costs in your project$$s cash flow analysis? Why or why not?

$2.$ What are NET SALES and NET VARIABLE COSTS each year?

$3.$ What is the depreciation cost each year?

$4.$ What is the operating cash flow each year?

$5.$ What is the net working capital cash flow each year?

$6.$ What is the cash flow on equipment sales in year $5$ after adjusting taxes?

$7.$ What are this project's net cash flows $($Net CF$)$ each year, starting from year $0?$

$8.$ What is the payback period for the project?

$9.$ What is the profitability index of the project?

$10.$ What is the IRR of the project?

$11.$ What is the MIRR of the project?

$12.$ What is the NPV of the project?

$13.$ What is your final recommendation to the CEO about this new project?