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If they used all of the cash to pay back the loan, in what year would the loan be paid? Conch Republic Electronics(CRE) CRE is

  1. If they used all of the cash to pay back the loan, in what year would the loan be paid?

Conch Republic Electronics(CRE)

CRE is a midsized electronics manufacturer located in Key West, Florida.They are introducing a new Smart Phone to replace their existing Smartphone noted especially for automatically playing Jimmy Buffett songs when turned on.

The CEO has hired Bobby Hatter, a recent Stetson MBA graduate, to provide a report on the feasibility of this new venture.Bobby has documented the following facts:

CRE spent $175,000 to develop a prototype of the new phone and then spent $22,000 for a Marketing Study to determine the expected sales figures.

The variable cost to manufacture the phone are $352 per phone.

Fixed costs are estimated at $80,000 per year.

The phone will sell for $425 each with estimated sales volumes as follows:

YR 1 1500

YR 2 4700

Yr3 5900

Yr4 3200

Yr5 2000

The equipment to produce the phone will cost $450,000 and will be depreciated on a straight-line basis over the 5-year project life cycle.CRE has a corporate tax rate of 21% and feels that it must earn at least a return of 20% on this project.CRE borrowed $475,000 to fund this project (beginning balance), so after the purchase of the equipment, the remaining balance was in the bank as working capital.Bobby noted that although there was a loss in year 1, the project showed a positive cash flow and he had to explain this to his management of where the $29,500 came from.

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