Question
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
- 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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