Question

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 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 $1.2 million 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 $250,000 for a marketing study to determine the expected sales figures for the new smartphone. Conch Republic can manufacture the new smartphone for $210 each in variable costs. Fixed costs for the operation are estimated to run $5.3 million per year. The estimated sales volumes are 64,000, 106,000, 87000, 78,000, and reach of the next five years, respectively. The unit price of the new smartphone will be $515. The necessary equipment can be purchased for $38.5 million and will be depreciated on a seven-year MACRS schedule. It is believed the value of the equipment in five years will be $5.8 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 thus will occur first in Year 1 with the first year's sales. Conch Republic has a 22 percent corporate tax rate and a required return of 12 percent. Shelly has asked Jay to prepare a report that answers the following questions: QUESTIONS

Answer 1

Operating flow (OCF) each year = income after tax + depreciation - change in NWC

In year 5, the entire working capital investment is recovered.

Loss on sale of equipment at end of year 5 = book value - sale price

book value = original cost - accumulated depreciation

after-tax salvage value = salvage value + tax benefit on loss on sale of equipment (the loss is tax deductible, and hence reduces the tax outgo. This is treated as a cash inflow)

NPV and IRR are calculated using NPV and IRR functions in Excel

1]

Payback period is the time taken for the cumulative cash flows to equal zero

Payback period = 2 + (cash flow required in year 3 for cumulative cash flows to equal zero / year 3 cash flow) = 2 + ( $13,958,334 / $20,001,703) = 2.70 years

2]

PI = (NPV + initial investment) / initial investment

PI is 1.52

3]

IRR is 28.07%

4]

NPV is $19,845,464

D E F BC 0 1 2 3 4 2 3 Initial Investment cost of equipment $38,500,000 OCE 6 Units sold 7 Revenues 8 - Fixed Costs 9 - Variable Costs 10 - Depreciation 11 Earnings before tax 12 - Taxes 13 Earnings after tax 14 + Depreciation 15 NWC required 16 - Change in NWC 17 OCF 64,000 $32,960,000 $5,300,000 $13,440,000 $5,501,650 $8,718,350 $1,918,037 $6,800,313 $5,501,650 $6,592,000 $6,592,000 $5,709,963 106,000 $54,590,000 $5,300,000 $22,260,000 $9,428,650 $17,601,350 $3,872,297 $13,729,053 $9,428,650 $10,918,000 $4,326,000 $18,831,703 87,000 $44,805,000 $5,300,000 $18,270,000 $6,733,650 $14,501,350 $3,190,297 $11,311,053 $6,733,650 $8,961,000 ($1,957,000) $20,001,703 78,000 54,000 $40,170,000 $27,810,000 $5,300,000 $5,300,000 $16,380,000 $11,340,000 $4,808,650 $3,438,050 $13,681,350 $7,731,950 $3,009,897 $1,701,029 $10,671,453 $6,030,921 $4,808,650 $3,438,050 $8,034,000 $5,562,000 ($927,000) ($8,034,000) $16,407,103 $17,502,971 18 $5,800,000 $29,910,650 $8,589,350 $613,657 $6,413,657 19 Terminal Cash Floy 20 Salvage Value 21 Accumulated depreciation 22 Book value of equipment 23 Tax 24 Salvage Value after tax 25 26 NPV Analysis 27 Project Cash Flows 28 29 NPV 30 IRR 31 Cumulative Project Cash Flows 32 Payback Period 33 PI 34 ($38,500,000) $5,709,963 $18,831,703 $20,001,703 $16,407,103 $23,916,628 $19,845,464 28.07% ($38,500,000) ($32,790,037) ($13,958,334) 2.70 152 $6,043,369 $22.450,472 $46,367.100

в 1 2 3 4 5 2 Initial Investment cost of equipment 38500000 5 OCF 6 Units sold 7 Revenues 8 - Fixed Costs 9 -Variable Costs 10 - Depreciation 11 Earnings before tax 12 - Taxes 13 Earnings after tax 14 + Depreciation 15 NWC required 16 - Change in NWC 17 OCF 64000 =C6'515 5300000 =C6210 = $B$314.29% =C7-C8-C9-C10 =C11 22% =C11-C12 =C10 =C7'20% =C15-B15 =C13+C14-C16 106000 =D6'515 5300000 =D6*210 = $B$3'24.492 =D7-08-09-010 =D11 22% =D11-D12 =D10 =D7'20% =D15-C15 =D13+D14-D16 87000 -E6'515 5300000 =E6'210 = $B$3'17.49% =E7-E8-E9-E10 =E11222 =E11-E12 =E10 =E7"20% =E15-D15 =E13+E14-E16 78000 =F6'515 5300000 =F6'210 = $B$312.49% =F7-F8-F9-F10 =F11222 =F11-F12 =F10 =F7*20% =F15-E15 =F13+F14-F16 54000 =G6'515 5300000 =G6'210 = $B$3*8.932 =G7-G8-G9-G10 =G11 22% =G11-G12 =G10 =G7"20% =-SUM(C16:F16) =G13+G14-G16 18 19 Terminal Cash Floy 20 Salvage Value 21 Accumulated depreciation 22 Book value of equipment 23 Tax 24 Salvage Value after tax 5800000 = SUM(C10:G10) =B3-G21 = (G22-G20)*227 =G20+G23 & 899NNNNNNNNN 26 NPV Analysis 27 Project Cash Flows =-B3 =C17 =D17 =E17 =F17 =G17+G24 29 NPV 30 IRR 31 Cumulative Project Cash Flows 32 Payback Period 33 PI =NPV(127,C27:G27)+B27 =IRR(B27:G27) =B27 =2+(-D31E27) =(B29+B3/B3 =B31+C27 =C31+D27 =D31+E27 =E31+F27 =F31+G27