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FALL 2023 FINAL PROJECT FINANCE 3090 - BUSINESS FINANCE Triple J Sports projects unit sales for a new athletic training device. Production of the devices will require $6,500,000 in net working capital to start and additional net working capital investments each year equal to 15 percent of the projected sales increase for the following year. Total fixed costs are $5,900,000 per year, variable production costs are $525 per unit, and the unit price is $695 each. The equipment needed to begin production has an installed cost of $22,500,000. Because the devices are intended for professional athletes, this equipment is considered industrial machinery and thus qualifies as seven-year MACRS property. In five years, this equipment can be sold for about 10 percent of its acquisition cost. The company is in the 35 percent marginal tax bracket and has a required return on all its projects of 18 percent. The unit sales information and MACRS depreciation schedule follow: MACRS DEPRECIATION BY CLASS OF PROPERTY MACRS 7-year property (ex: office furniture and fixtures such as desks, fax machines, lamps, files, chairs). REOUIRMENTS: (TOTAL POSSIBLE POINTS IS 280) 1. Prepare the financial statements based on the information provided. 2. Based on the project estimates, what is the NPV of the project? 3. What is the IRR? 4. What do these results indicate in terms of whether the project is worth consideration or not? Based strictly on the calculations, should the project be accepted or rejected? Conch Republic Electronics, Part 1 Conch Republic Electronics is a midsized electronics manufacturer located in Key West, Florida. The company president is Page 355 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 $950,000 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 $250,000 for a marketing study to determine the expected sales figures for the new smartphone. Conch Republic can manufacture the new smartphones for $245 each in variable costs. Fixed costs for the operation are estimated to run $6.9 million per year. The estimated sales volume is 160,000,170,000,130,000,105,000, and 80,000 per year for the next five years. respectively. The unit price of the new smartphone will be $575. The necessary equipment can be purchased for $49.5 million and will be depreciated on a seven-year [ MACRS schedule. It is believed the value of the equipment in five years will be $6.8 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 $435 per unit, with variable costs of \$155 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 $235 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 prepare a 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? Chapter 10 Conch Republic Electronics, Part 1 Net CF $7,650,446 $26,897,736 $30,848,086 $26,095,836 $28,408,274 Salvage BV of equipment s Taxes Salvage CF \begin{tabular}{rr} 891,125 \\ \hline$7,691,125 \end{tabular} (Book Value-Market Value[RECALL Salvage value was given]]) Tax rate Net CF \begin{tabular}{|c|c|c|} \hline \multicolumn{3}{|l|}{ Time } \\ \hline 0 & (49,500,000) & \\ \hline 1 & 7,650,446 & \\ \hline 2 & 26,897,736 & \\ \hline 3 & 30,848,086 & \\ \hline 4 & 26,095,836 & \\ \hline 5 & 36,099,398 & Year five cash flows plus after tax salvage value \\ \hline \multirow[t]{2}{*}{ Payback period } & 2.485 & \begin{tabular}{l} Using this method, you would subtract the cash flows from the \\ invested capital until the initial investment is paid back. Recall, \\ this is NOT a reliable tool for evaluating a project. \end{tabular} \\ \hline & 1.764 & \begin{tabular}{l} The Profitability Index is greater than 1. This value indicates \\ that we can expect to earn approximately 77 cents on every \\ dollar invested. Calculate by dividing the NPV of the cash flows \\ by the initial investment \end{tabular} \\ \hline IRR & 34.42% & Exceeds the 12% required rate of return, so worth considering \\ \hline IPV of the Project & $37,798,666.04 & positive so profitable project \\ \hline \end{tabular} \begin{tabular}{|c|c|c|} \hline & & \\ \hline & & \\ \hline & & \\ \hline & & \\ \hline & & \\ \hline & & \\ \hline & & \\ \hline & & \\ \hline \multicolumn{3}{|c|}{ PAYBACK PERIOD } \\ \hline 49500000 & $7,650,446 & $41,849,555 \\ \hline$41,849,555 & $26,897,736 & $14,951,819 \\ \hline$14,951,819 & $30,848,086 & ($15,896,267) \\ \hline($15,896,267) & $26,095,836 & ($41,992,102) \\ \hline($41,992,102) & $28,408,274 & ($70,400,376) \\ \hline \end{tabular} 2.484691959