Payback period, profitability index, IRR and NPV

Conch Republic Electronics

Spent $750,000 to develop a new PDA Spent an additional $200,000 for marketing study to determine the expected sales. Can manufacture the new PDA with variable cost for $155.00 each. Fixed Costs for the operation are estimated at $4.7 million per year. Unit Price $360.00 each Necessary equipment to produce the PDA will cost $21.5 million, with depreciation for 7 years MACRS schedule. It is believed that this equipment after 5 years will be worth $4.1 million. NWC will be 20% of Sales Changes in NWC will occur in Year 1, with the first year sales. There is no initial outlay for NWC. Conch Republic Corporate Tax Rate is 35% and has a 12% required return.

Estimated Sales Volumes: NWC 20%

Estimated sales volume per year is 1. 74,000 2. 95,000 3. 125,000 4. 105,000 5. 80,000

a Please assess the sales in Year 1 and 2, respectively.

b Estimate the net cash flows (CF) in Year 1 to Year 5 (Please show all calculation steps, including breakdown of net sales, operating cash flow (OCF), net working capital (NWC CF), etc.)

c What is the payback period of the project?

d What is the profitability index of the project?

e What is the IRR of the project?

f What is the NPV of the project?