Question

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 years, the panded into manufacturing and is now a reputal of various electronic items. Jay McCanless, a re- aduate, has been hired by the company's finance 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. As previously stated, Conch Republic currently manufac- tures a smartphone. Production of the existing model is ex- pected 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 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 ex- isting smartphone will fall by 30,000 units per year, and the price of the existing units will have to be lowered to $215 each. lowered to $215 each. 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, 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 percent corporate tax rate and a required return of 12 percent. Shelley has asked Jay to prepare a report that answers the following questions. excellent. The sm of the major revenue-producing items manufactured epublic is a smartphone. Conch Republic currently e smartphone model on the market, and sales have been lent. The smartphone is a unique item in that it comes in a ety of tropical colors and is preprogrammed to play Jimmy cut music. However, as with any electronic item, technol- oy changes rapidly, and the current smartphone has limited fures in comparison with newer models. Conch Republic enent $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 ex- pected 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 ny QUESTIONS 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?

Answer 1

	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
	Depreciation expense		$      62,16,150	$   1,06,53,150	$      76,08,150	$     54,33,150	$      38,84,550
	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		$            95,000	$             65,000
	Contribution magin at $385-$145 = $240		$ 2,28,00,000	$   1,56,00,000
	Sales in units with new phone		$            65,000	$             35,000
	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
1)	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 =	2.4	Years
2)	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
	PI = PV of cash inflows/Initial investment = 80084768/43500000 =	1.84
3)	IRR:
	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
	PVIF at 37%	1	0.72993	0.53279	0.3889	0.28387	0.2072
	PV at 37%	$ -4,35,00,000	$      27,87,330	$   1,42,69,759	$   1,24,16,794	$     65,10,734	$      65,81,100
	IRR = 36+662523/(662523+934283) =	36.41%
4)	NPV:
	= PV of cash inflows-Initial investment = 80084768-43500000 =	$   3,65,84,768