Depreciation rate : MACRS schedule we considerY1 14.29% Y2 24.49% Y3 17.49% Y4 12.49% Y5 8.93%
MINICASE CONCH REPUBLIC ELECTRONICS, PART1 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 revenueproducing items manufactured by Conch Republic is a smartphonc. Conch Republic currently has one smartphone model on the market. and sales have been excellent. The stnartphone 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. page 349 and the current smartphone has limited features in comparison with newer models. Conch Republic spent 5750.000 to develop a prototype for a new smartphouc that has all the features of the existing sntarlphouc but adds new features such as WiFi tethering. The company has spent a further 5200.000 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 ttnit 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 smartphonc. sales of the existing smartphonc 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 sniartphones will be 20 percent of sales and will https;html1-c|uster-e.mheducationeomlsmartbook2fdataf1564141highl...ter010jch10_reader_15.xhtml?mobile=falselstreEx:trueiepubztrue Page 1 of 2 Minicase 7:311'19, 3:14 PM 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 ltas asked Jay to prepare a report that answers the following questions. QUESTTONS 1. What is the payback period of the project? What is the profitability index of the project? What is the IRR of the project? PP!\" What is the NPV of the project? Equipment Salvage value R&D Marketing study Sales(units) Depreciation rate Sales of old phone Lost sales Price per unit Variable Cost per unit Fixed Cost Price of old phone Revised price of old phone VC of old phone Tax rate NWC percentage Required return $43,500,000 $6,500,000 $750,000 $200,000 Year 1 155,000 14.29% 95,000 30,000 $535 $220 $6,400,000 $385 $215 $145 21% 20% 12% input sunk cost sunk cost Year 2 165,000 24.49% 65,000 30,000 Year 3 125,000 17.49% Year 4 95,000 12.49% Year 5 75,000 8.93%
