Conch Republic Electronics is a midsized electronics
manufacturer located in Key West, Florida. The company president is
Shelly Couts, who inherited the company. When it was founded over
70 years ago, the company originally repaired radios and other
household appliances. Over the years, the company expanded into
manufacturing and is now a reputable manufacturer of various
electronic items. Jay McCanless, a recent MBA graduate, has been
hired by the company's finance department.
One of the major revenue-producing items manufactured by Conch
Republic is smart phone. Conch Republic currently has one smart
phone model on the market, and sale has been excellent. The smart
phone 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 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 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 smart phone
Conch Republic can manufacture the new smart phone for $220 each in
variable costs. Fixed costs for the operation are estimated to run
6.4 million per year. The estimated sales volume is
155,000, 165,000
,125,000, 95,000,
75,000 per each year for the next five years,
respectively. The unit price of the new smart phone will be $535.
The necessary equipment can be purchased for $43.5 million and will
be depreciated on a 7 year MACRS schedule. It is believed the value
of the equipment in 5 years will be $6.5 million.
As previously stated, Conch Republic currently manufactures a
smartphone. 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 95,000 units and 65,000 units for the
next two years, respectively. The price of the existing smartphone
is $385 per unit, with the variable costs of $145 each and fixed
costs of $4.3 million per year. If Conch Republic does introduce
the new smartphone, sales of the existing smartphone will fall by
30,000 units per year and the price of the existing units will have
to be lowered to $215 each. Net working capital for the smartphones
will be 20% of sales and will occur with the timing of cash flows
for the year; for example, there is no initial outlay for NWC, but
changes in NWC will first occur in Year 1 with the first year’s
sales. Conch Republic has a 21% corporate tax rate and required
return of 12 percent.
Shelley has asked Jay to prepare a report that answers the following questions:
CONCH REPUBLIC ELECTRONICS: | 0 | 1 | 2 | 3 | 4 | 5 | ||
Sales in units of new smart phone | 155000 | 165000 | 125000 | 95000 | 75000 | |||
Sales revenue ($535) | $ 8,29,25,000 | $ 8,82,75,000 | $ 6,68,75,000 | $ 5,08,25,000 | $ 4,01,25,000 | |||
Variable cost ($220) | $ 3,41,00,000 | $ 3,63,00,000 | $ 2,75,00,000 | $ 2,09,00,000 | $ 1,65,00,000 | |||
Fixed costs (other than depreciation) | $ 64,00,000 | $ 64,00,000 | $ 64,00,000 | $ 64,00,000 | $ 64,00,000 | |||
Depreciation (7 Year MACRS) % | 14.29 | 24.49 | 17.49 | 12.49 | 8.93 | Total Depn | Book Value | |
Depreciation expense | $ 62,16,150 | $ 1,06,53,150 | $ 76,08,150 | $ 54,33,150 | $ 38,84,550 | $ 3,37,95,150 | $ 97,04,850 | |
EBIT (New smart phone) | $ 3,62,08,850 | $ 3,49,21,850 | $ 2,53,66,850 | $ 1,80,91,850 | $ 1,33,40,450 | |||
Contribution lost on existing smart phone: | ||||||||
Sales in units without new phone | 95000 | 65000 | ||||||
Contribution magin at $385-$145 = $240 | $ 2,28,00,000 | $ 1,56,00,000 | ||||||
Sales in units with new phone | 65000 | 35000 | ||||||
Contribution margin at $215-$145 = $70 | $ 45,50,000 | $ 24,50,000 | ||||||
Loss in contribution with new phone | $ 1,82,50,000 | $ 1,31,50,000 | ||||||
Incremental EBIT | $ 1,79,58,850 | $ 2,17,71,850 | $ 2,53,66,850 | $ 1,80,91,850 | $ 1,33,40,450 | |||
Tax at 21% | $ 37,71,359 | $ 45,72,089 | $ 53,27,039 | $ 37,99,289 | $ 28,01,495 | |||
NOPAT | $ 1,41,87,492 | $ 1,71,99,762 | $ 2,00,39,812 | $ 1,42,92,562 | $ 1,05,38,956 | |||
Add: Depreciation | $ 62,16,150 | $ 1,06,53,150 | $ 76,08,150 | $ 54,33,150 | $ 38,84,550 | |||
OCF | $ 2,04,03,642 | $ 2,78,52,912 | $ 2,76,47,962 | $ 1,97,25,712 | $ 1,44,23,506 | |||
Capital expenditure | $ 4,35,00,000 | |||||||
Change in NWC | $ 1,65,85,000 | $ 10,70,000 | $ -42,80,000 | $ -32,10,000 | $ -21,40,000 | |||
Release of NWC | $ 80,25,000 | |||||||
After tax salvage value = [6500000+(9704850-6500000)*21%] | $ 71,73,019 | |||||||
After tax annual cash flows | $ -4,35,00,000 | $ 38,18,642 | $ 2,67,82,912 | $ 3,19,27,962 | $ 2,29,35,712 | $ 3,17,61,524 | ||
PAYBACK PERIOD: | ||||||||
Cumulative after tax cash flows | $ -4,35,00,000 | $ -3,96,81,359 | $ -1,28,98,447 | $ 1,90,29,515 | $ 4,19,65,226 | $ 7,37,26,750 | ||
Payback period = 2+12898447/31927962 = | 2.40 | Years | ||||||
PVIF at 12% [PVIF = 1/1.12^n] | 1 | 0.89286 | 0.79719 | 0.71178 | 0.63552 | 0.56743 | ||
PV at 12% | $ 34,09,501 | $ 2,13,51,173 | $ 2,27,25,692 | $ 1,45,76,059 | $ 1,80,22,342 | $ 8,00,84,768 | ||
PI = PV of cash inflows/Initial investment = 80084768/43500000 = | 1.84 | |||||||
IRR: | NPV | |||||||
PVIF at 36% [PVIF = 1/1.12^n] | 1 | 0.73529 | 0.54466 | 0.40345 | 0.29885 | 0.22137 | ||
PV at 36% | $ -4,35,00,000 | $ 28,07,825 | $ 1,45,87,642 | $ 1,28,81,450 | $ 68,54,440 | $ 70,31,166 | $ 6,62,523 | |
PVIF at 37% | 1 | 0.72993 | 0.53279 | 0.38890 | 0.28387 | 0.20720 | ||
PV at 37% | $ -4,35,00,000 | $ 27,87,330 | $ 1,42,69,759 | $ 1,24,16,794 | $ 65,10,734 | $ 65,81,100 | $ -9,34,283 | |
IRR = 36+662523/(662523+934283) = | 36.41% | |||||||
NPV: | ||||||||
NPV = PV of cash inflows-Initial investment = 80084768-43500000 = | $ 3,65,84,768 |
Conch Republic Electronics is a midsized electronics manufacturer located in Key West, Florida. The company president is Shelly Couts, who inherited the company. When it was founded over 70 years ago,...
Conch Republic Electronics is a midsized electronics manufacturer located in Key West, Florida. The company president is Shelley Couts, who inherited the company. When it was founded over 70 years ago, the company originally repaired radios and other household appliances. Over the years, the company expanded into manufacturing and is now a reputable manufacturer of various electronic items. Jay McCanless, a recent MBA graduate, has been hired by the company’s finance department. One of the major revenue-producing items manufactured by...
Conch Republic Electronics is a midsized electronics manufacturer located in Key West, Florida. The company president is Shelley Couts, who inherited the company. When it was founded over 70 years ago, the company originally repaired radios and other household appliances. Over the years, the company expanded into manufacturing and is now a reputable manufacturer of various electronic items. Jay McCanless, a recent MBA graduate, has been hired by the company’s finance department. One of the major revenue-producing items manufactured by...
Conch Republic Electronics is a midsized electronics manufacturer located in Key West, Florida. The company president is Shelley Couts, who inherited the company. When it was founded over 70 years ago, the company originally repaired radios and other household appliances. The company is entirely equity financed, with 9 million shares of common stock outstanding. The stock currently trades at $42.50 per share. Over the years, the company expanded into manufacturing and is nowa reputable manufacturer of various electronic items. Jay...
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 over 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...
Conch Republic Elea facturer located in Key is Shelley Couts, who inh founded over 70 radios and other household company expanded in manufacturer of various cent MBA graduate, has bee department. One of the major revenu by Conch Republic is a sm ch Republic Electronics, Part 1 oublic Electronics is a midsized electronics in Key West, Florida. The company president s. who inherited the company. When it was over 70 years ago, the company originally repaired household appliances. Over the...
CAPITAL BUDGETING 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 over 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...
onch 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...
only answer 1,2,5 Conch Republic Electronics 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...
38% 9:00 AM Tue Mar 3 u CONCH REPUBLIC ELECTRONICS, PART 1 Conch Republic Electronics is a midsized electronics manufacturer located in Key West, Florida. The company president is Shelley Couts, who inherited the company. When it was founded over 70 years ago, the company originally repaired radios and other household appliances. Over the years, the company expanded into manufacturing and is now a reputable manufacturer of various electronic items. Jay McCanless, a recent MBA graduate, has been hired by...
CHAPTER CASE CONCH REPUBLIC ELECTRONICS C onch Republic Electronics is a midsizad olectron- los 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 over 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 com- pany in...