ic Chapter 10 Making Capital Investment Decisions 349 have been excellent. The smart phone 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 elec- tronic item, technology changes rapidly, and the current smart phone has limited features in comparison with newer models. Conch Republic spent $750,000 to develop a prototype for a new smart phone that has all the features of the existing smart phone but adds new features such as WiFi tethering. The com- pany has spent a further $200,000 for a marketing study to determine the expected sales figures for the new smart phone. Conch Republic can manufacture the new smart phones for $215 each in variable costs. Fixed costs for the operation are estimated to run $6.1 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 smart phone will be $520. The necessary equipment can be purchased for $40.5 million and will be depreciated on a seven-year MACRS schedule. It is believed the value of the equipment in five years will be $6.1 million. not introduce the new smart phone, sales will be 95,000 units and 65,000 units for the next two years, respectively. The price of the existing smart phone is $380 per unit, with variable costs of $145 each and fixed costs of $4.3 million per year. If Conch Republic does introduce the new smart phone, sales of the existing smart phone will fall by 30,000 units per year, and the price of the existing units will have to be lowered to $210 each. Net working capital for the smart phones 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 I with the first year's sales. Conch Republic has a 35 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? 4. What is the NPV of the project? As previously stated, Conch Republic currently manufac- tures a smart phone. Production of the existing model is ex- pected to be terminated in two years. If Conch Republic does points for each manufacturing process? What is the DOL for each manufacturing process? Graph the DOL for each manufac- turing process on the same graph for different unit sales. c MINICASE has asked Jay to analyze how changes in the price of the new smart phone and changes in the quantity sold will affect the NPV of the project. Shelley has asked Jay to prepare a memo answering the following questions. Conch Republic Electronics, Part 2 Shelley Couts, the owner of Conch Republic Electronics, had received the capital budgeting analysis from Jay McCanless for the new smart phone the company is considering. Shelley was pleased with the results, but she still had concerns about the new smart phone. Conch Republic had used a small market research firm for the past 20 years, but recently the founder of that firm retired. Because of this, she was not convinced the sales projections presented by the market research firm were entirely accurate. Additionally, because of rapid changes in technology, she was concerned that a competitor could enter the market. This would likely force Conch Republic to lower the sales price of its new smart phone. For these reasons, she QUESTIONS 1. How sensitive is the NPV to changes in the price of the new smart phone? 2. How sensitive is the NPV to changes in the quantity sold of the new smart phone