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 its preprogrammed to play 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 smartphone 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 smartphones 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, and 75,000 per year for the next five years, respectively. The unit price of the new smartphone will be $535. The necessary equipment can be purchased for $43.5 million and will be depreciated on a seven-year MACRS schedule. It is believed the value of the equipment in five years will be $6.5 million.
Net working capital for the smartphone will be 20% 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 first occur in Year 1 with the first year’s sales. Conch Republic has a 21% corporate tax rate and a required return of 12%.
1: Direct Cash Flow Analysis
Suppose that you are Jay McCanless and you have been asked by Shelly Counts, the president of the company, to create an Excel model with a direct cash flow forecast for the new smartphone. After you estimate the incremental cash flows from the new smartphone, calculate the NPV and IRR of the project.
2: Scenario Analysis
After you conduct the base scenario analysis in number 1, you are required to do NPV analysis for the best and worst scenarios.
3: Recommendation
Based on the analysis you conducted in 1 and 2, make a recommendation on whether or not to proceed with this new smartphone project. Outline your analysis.
Below analysis show that in any scenario it will be profitable so it a good project and recommendation is to go ahead with it
It is earning IRR of 40% plus even in the worst scenario
Invt | $750,000 | |||||||||||
Market study | $200,000 | Net working capital for the smartphone will be 20% of sales | ||||||||||
Fixed cost | $6.4m | 6,400,000 | The Conch Republic has a 21% corporate tax rate and a required return of 12%. | |||||||||
Equipment | $43.5 million | 43,500,000 | ||||||||||
Base | Best | Worst | Depreciation | |||||||||
Variable cost | $220 | 200 | 260 | |||||||||
Units | Year | SP | $535 | $535 | 420 | |||||||
Invt | 0 | All costs Investment+study+fixed cost+equipmen | ($50,850,000) | ($50,850,000) | ($50,850,000) | |||||||
155,000 | 1 | Sales -Working capital +Depn = Cashflow | 38,456,150 | 41,556,150 | 17,996,150 | 1 | 14.29 | 6,216,150 | ||||
165,000 | 2 | Sales+Depn = Cashflow | 62,628,150 | 65,928,150 | 37,053,150 | 2 | 24.49 | 10,653,150 | ||||
125,000 | 3 | Sales+Depn = Cashflow | 46,983,150 | 49,483,150 | 27,608,150 | 3 | 17.49 | 7,608,150 | ||||
95,000 | 4 | Sales+Depn = Cashflow | 35,358,150 | 37,258,150 | 20,633,150 | 4 | 12.49 | 5,433,150 | ||||
75,000 | 5 | Sales+Depn+Working capital = Cashflow | 44,094,550 | 45,594,550 | 28,904,550 | 5 | 8.93 | 3,884,550 | ||||
NPV | $102,094,178 | $110,341,207 | $39,215,562 | 6 | 8.92 | 3,880,200 | ||||||
IRR | 86% | 92% | 42% | 7 | 8.93 | 3,884,550 | ||||||
8 | 4.46 | 1,940,100 | ||||||||||
43,500,000 | ||||||||||||
One of the major revenue-producing items manufactured by Conch Republic is a smartphone. Conch Republic currently...
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...
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...
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...
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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...
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 Electronics Conch Republic Electronics is a mid sized 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...
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...