Questions 1, 2, & 4 (Use Straight line depreciation over 7 years instead of MACRS

onch Republic Electronics is a midsized electronics company has spent a further $250,000 for a marketing manufacturer located in Key West, Florida. The com-_ study to determine the expected sales figures for the pany president is Shelly Couts, who inherited the com- new smartphone. pany. The company originally repaired radios and other Conch Republic can manufacture the new smarthousehold appliances when it was founded more than phone for $210 each in variable costs. Fixed costs for 70 years ago. Over the years, the company has ex. the operation are estimated to run $5.3 million per panded, and it is now a reputable manufacturer of vari- year. The estimated sales volumes are 64,000,106,000, ous specialty electronic items. Jay McCanless, a recent 87,000,78,000, and 54,000 per year for each of the MBA graduate, has been hired by the company in its fi- next five years, respectively. The unit price of the new nance department. smartphone will be $515. The necessary equipment One of the major revenue-producing items manu- can be purchased for $38.5 million and will be deprecifactured by Conch Republic is a smartphone. Conch Re- ated on a seven-year MACRS schedule. It is believed public currently has one smartphone model on the the value of the equipment in five years will be $5.8 market and sales have been excellent. The smartphone million. is a unique item in that it comes in a variety of tropical Net working capital for the smartphones will be colors and is preprogrammed to play Jimmy Buffett mu- 20 percent of sales and will occur with the timing of the sic. However, as with any electronic item, technology cash flows for the year (i.e., there is no initial outlay for changes rapidly, and the current smartphone has limited NWC). Changes in NWC thus will occur first in Year 1 with features in comparison with newer models. Conch Re- the first year's sales. Conch Republic has a 22 percent public spent $1.2 million to develop a prototype for a corporate tax rate and a required return of 12 percent. new smartphone that has all the features of the existing Shelly has asked Jay to prepare a report that one but adds new features such as Wifi tethering. The answers the following questions: QUESTIONS 1. What is the payback period of the project? 6. How sensitive is the NPV to changes in the quan- 2. What is the profitability index of the project? tity sold? 3. What is the IRR of the project? 7. Should Conch Republic produce the new 4. What is the NPV of the project? smartphone? 5. How sensitive is the NPV to changes in the price 8. Suppose Conch Republic loses sales on other of the new smartphone? models because of the introduction of the new model. How would this affect your analysis