MINICASE

Conch Republic Electronics, Part $1$

Conch Republic Electronics is a midsized electronics manufacturer located in Key West, Florida. The company president is

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\mathrm{.}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\mathrm{.}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\mathrm{.}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\mathrm{.}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

What is the payback period of the project?

What is the profitability index of the project?

What is the IRR of the project?

What is the NPV of the project?