MINICASE Conch Republic Electronics, Part 1 Conch lacturer Reoublic Electronics is a midsized electronics manu be purchased for $43.5 million and will be depreciated on a socated in Key West. Florida. The company president seven-year MACRS schedule. It is believed the value of the olcy Couts who inherited the company. When it was tunded over 70 years ago, the company originally repaired equipment in five years will be S6.5 millicn As previously stated, Conch Republic currently manufac- nd other household appliances. Over the years, the tures a smariphone. Production of the existing model is expanded into manufacturing and is now a reputable pected to be terminated in two years. If Conch Republic does efacturer of various electronic items. Jay McCanless, a re not introduce the new smartphone. sales will be 95,000 units en MBA graduate, has been hired by the company's financeand 65,000 units for the next two years, respectively. The price of the existing smartphone is S385 per unit, with variable costs One of the major revenue-producing items manufactured of $145 each and fixed costs of S4.3 million per year. If Conch b Conch Republic is a smartphone. Conch Republic currently Republic does introduce the new smartphone, sales of the ex one smartphone model on the market, and sales have been isting smartphone will fall by 30,000 units per year, and the ctlient The smartphone is a unique item in that it comes in a price of the existing units will have to be lowered to S215 each unty of tropical colors and is preprogrammed to play Jimmy Net working capital for the smartphones will be 20 percent Bufient music However, as with any electronic item, technol- of sales and will occur with the timing of the cash flows for urtment hanges rapidly, and the current smartphone has limited the year, for example, there is no initial outlay for NWC, but iatutes in comparison with newer models. Conch Republic changes in NWC will first occur in Year I with the first year's peot 5750000 to develop a prototype for a new smartphone sales. Conch Republic has a 21 percent corporate tax rate and oat has all the features of the existing smartphone but adds a required return of 12 percent. e latures such as WiFi tethering. The company has spent ufirber $200,000 for a marketing study to determine the ex- following questions eted sules figures for the new smartphon Shelley has asked Jay to prepare a report that answers the Cimh Republic can manufacture the new smartphones for QUESTIONS 20each in variable costs. Fixed costs for the operation are 1., What is the payback period of the project nineed to run $6.4 million per year. The estimated sales 155,000, 165,000. 125.000., 95.000, and 75.000 per he next five years, respectively. The unit price of the necessary equipment can What is the profitability index of the project? What is the IRR of the project s imuriphone will be $535. The 4. What is the NPV of the project