MINICASE Conch Republic Electronics, Part Conch Republic Electronics is a midsized electronics manufac- I be depreciated on a seven-year turer located in Key West. Florida. The company president is MACRS schedule. It is believed the value of the equipment Shelley Couts, who inherited the company. When it was five years will be $4.1 million founded over 70 years ago, the company originally repaired As previously stated, Conch Republic currently manufac radios and other household appliances. Over the years, the tures a PDA. Production of the existing model is ex company expanded into manufacturing and is now a reputable terminated in two years. If Conch Republic does not introduce manufacturer of various electronic items. Jay McCanless, a the new PDA, sales will be 80,000 units and 60,000 units for recent MBA graduate, has been hired by the company's finance the next two years, respectively. The price of the existing PD ment. is $290 per unit, with variable costs of S120 each and fixed One of the major revenue-producing items manufactured costs of $1,800,000 per year. If Conch Republic does introduce by Conch Republic is a personal digital assistant (PDA). Conch the new PDA, sales of the existing PDA will fall by 15,000 Republic currently has one PDA model on the market, and units per year, and the price of the existing units will have to be sales have been excellent. The PDA is a unique item in that it lowered to $255 each. Net working capital for the PDAs will b comes in a variety of tropical colors and is preprogrammed to 20 percent of sales and will occur with the timing of the cash play Jimmy Buffett music. However, as with any electronic flows for the year; for example, there is no initial outlay fo item, technology changes rapidly, and the current PDA has lim- NWC, but changes in NWC will first occur in year 1 with ited features in comparison with newer models. Conch Repub- first year's sales. Conch Republic has a 35 lic spent $750,000 to develop a prototype for a new PDA that tax rate and a 12 percent required retu has all the features of the existing PDA but adds new features such as cell phone capability. The company has spent a further following questions $200,000 for a marketing study to determine the expected sales figures for the new PDA percent corporale Shelly has asked Jay to prepare a report that answers the Conch Republic can manufacture the new PDA for $155 QUESTIONS in variable costs. Fixed costs for the operation are esti 1. mated to run $4.7 million per year. The estimated sales volume is 74,000, 95,000, 125.000, 105,000, and 80.000 per each year r the next five years, respectively. The unit price of the new What is the payback period of the project? What is the profitability index of the project? 2. What is the IRR of the project? PDA will be S360. The necessary equipment can be purchased 4. What is the NPV of the project