Question No 1 (15 Marks) Conch Republic Electronics is a midsized electronics manufacturer located in Key West, Florida. The company president is Shelley Courts, who inherited the company. When it was founded over 20 years ago, the company originally repaired radies and other household appliances. Over the years, the company expanded into manufacturing and is now a reputable manufacturer of various clectronic im Jay Manless, a recent MBA graduale, has leen hired by the company's finance department One of the major resenic-producing items factural by Conch Republie is a smartphone. Conch Rullie currently has come startphone model on the market, and sales have been excellent. The smartphone is a unique items in that it comes in a variety of tropical colors and is preprogrammed to play Jimmy Buffett musie. However, in with any electronie item, technology changes rapidly, and the current smart phone has limited features in comparison with newer models. Conch Republic spent $750,000 to develop a prototype for a new smart phone that has all the features of the existing smart phone but addis 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 smart phones for 5185 each in variable costs. Fixed costs for the operation are estimated to run 553 million per year. The estimated sales volume is 20000, 55000, 100000, 10000, and 880.000 per year for the next five years, respectively. The unit price of the new smart phone will be 5480. The necessary equipment can be purchased for $20 million and will be depreciated on a seven-year MACRS schedule. It is believed the value of the equipment in five years will be 50.4 million As previously stated, Conch Republic currently manufactures a smart phone. 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 80,000 units and 60,000 units for the next two years, respectively. The price of the existing start phone is $10 per unit, with variable costs of S95 each and fixed costs of $1,800,00 per year. If Conch Republic does introduce the new smartphone, sales of the existing smart phone will fall by 15,000 units per year, and the price of the existing units will have to be lowered to $275 each Networking capital for the start phones 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 finst occur in Yearl with the first year's sales. Conch Republic has a 35 percent corporate tax rate and a 12 percent required return Shelley Couts, the owner of Conch Republic Electronics, had received the capital budgeting analysis from lay McCankiss for the new smartphone, the company is considering Shelley was pleased with the results, but she still had concerns about the new smart phone. Conch Republic had used a small market research fim for the past 20 years, but recently the founder of that firm retired. Because of this, she was not convinced the sales projections presented by the market research firm were entirely accurate. Additionally, because of rapid changes in technology she was consumed that a compartitor could enter the market. This would likely force Conch Republic to lower the sales price of its new smartphone For these reasons, she has asked Jay to analyze how changes in the price of the new smart phone and changes in the quantity sold will affect the NPV of the project, Shelley has asked Jay to prepare a memo answering the following questions, Required: 1. What is the payback period of the project? 2. What is the profitability index of the project? 3. What is the IRR of the project? 4. What is the NPV of the project? 5. How wensitive is the NPV to changes in the price of the new smart phone? 6. How sensitive is the NPV to changes in the quantity sold of the new smartphone