Please show formulas if possible. Thank you.
Chapter 9, Problem 1EMP 3 Bookmarks Show all steps: ON Chapter 9. For your convenience, we have entered the relevant values in the case, such as the price and variable cost, already. For this project, answer the following questions. a. What is the profitability index of the project? b. What is the IRR of the project? c. What is the NPV of the project? d. How sensitive is the NPV to changes in the price of the new smartphone? Construct a one- way data table to help you. e. How sensitive is the NPV to changes in the quantity sold? Reference Conch Republic Electronics case at the end of Chapter 9 Conch Republic Electronics is a midsized electronics manufacturer located in Key West, Florida. The company president is Shelly Couts, who inherited the company. The company originally repaired radios and other household appliances when it was founded more than 70 years ago. Over the years, the company has expanded, and it is now a reputable manufacturer of various specialty electronic items. Jay McCanless, a recent MBA graduate, has been hired by the company in its 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 $750,000 to develop a prototype for a new smartphone that has all the features of the existing one but adds new features such as wifi tethering. The company has spent a further $200,000 for a marketing study to determine the expected sales figures for the new smartphone. Conch Republic can manufacture the new smartphone for $205 each in variable costs. Fixed costs for the operation are estimated to run $5.1 million per year. The estimated sales volume is 64,000, 106,000, 87,000, 78,000, and 54,000 per year for the next five years, respectively. The unit price of the new smartphone will be $485. The necessary equipment can be purchased for $34.5 million and will be depreciated on a seven-year MACRS schedule. It is believed the value of the equipment in five years will be $5.5 million. 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 (i.e., there is no initial outlay for NWC). Changes in NWC will thus first occur in Year 1 with the first year's sales. Conch Republic has a 35 percent corporate tax rate and a required return of 12 percent. Equipment $ 32,500,000 Pretax salvage value $ 3,500,000 R&D $ 750,000 Marketing study $ 200,000 Year 2 Year 3 108,000 Year 4 94,000 Year 5 57,000 Sales (units) Sales of old PDA Lost sales Depreciation rate Year 1 65,000 80,000 15,000 14.29% 82,000 60,000 15,000 24.49% 17.49% 12.49% 8.93% Price VC S 500 215 4,300,000 35% 20% 12% Tax rate NWC percentage Required return Year 1 Year 2 Year 3 Year 4 Year 5 Sales VC Fixed costs Dep EBT Tax NI +Dep OCF NWC Beg End NWC CF Net CF Salvage BV of equipment Taxes Salvage CF Time Cash flow OHNM a. Profitability index b. IRR C. NPV d. Price per unit NPV 400 420 580 600 ANPV/APrice To find the sensitivity of the NPV to changes in quantity, we need to change the quantity sold manually since the quantity sold is different each year. If we add 100 units to each year's qauntity sold, the NPV is: NPV NPV/Quantity
