CASE 4 CONCH REPUBLIC ELECTRONICS Conch Republic Electronics is a midsized electronics manufacturer located in Key...

70.2K

Verified Solution

Question

Finance

CASE 4 CONCH REPUBLIC ELECTRONICS Conch Republic Electronics isa 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 originallyrepaired radios and other household appliances. Over the years, thecompany expanded into manufacturing and is now a reputablemanufacturer of various electronic items. Jay McCanless, a recentMBA graduate, has been hired by the company’s financedepartment.
One of the major revenue-producing items manufactured by ConchRepublic is a smartphone. Conch Republic currently has onesmartphone model on the market, and sales have been excellent. Thesmartphone is a unique item in that it comes in a variety oftropical 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 withnewer models. Conch Republic spent $750,000 to develop a prototypefor a new smartphone that has all the features of the existingsmartphone but adds new features such as WiFi tethering. Thecompany has spent a further $200,000 for a marketing study todetermine the expected sales figures for the new smartphone.
Conch Republic can manufacture the new smartphones for $220 eachin variable costs. Fixed costs for the operation are estimated torun $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 fiveyears, respectively. The unit price of the new smartphone will be$535. The necessary equipment can be purchased for $43.5 millionand will be depreciated on a seven-year MACRS schedule. It isbelieved the value of the equipment in five years will be $6.5million.
As previously stated, Conch Republic currently manufactures asmartphone. Production of the existing model is expected to beterminated in two years. If Conch Republic does not introduce thenew smartphone, sales will be 95,000 units and 65,000 units for thenext two years, respectively. The price of the existing smartphoneis $385 per unit, with variable costs of $145 each and fixed costsof $4.3 million per year. If Conch Republic does introduce the newsmartphone, sales of the existing smartphone will fall by 30,000units per year, and the price of the existing units will have to belowered to $215 each. Net working capital for the smartphones willbe 20 percent of sales and will occur with the timing of the cashflows for the year; for example, there is no initial outlay forNWC, but changes in NWC will first occur in Year 1 with the firstyear’s sales. Conch Republic has a 21 percent corporate tax rateand a required return of 12 percent. Shelley has asked Jay toprepare a report that answers the following questions.
1. What are operating cash flows from Year 1 to Year 5 of theproject? What are net cash flows for each year? Show details ofyour working.
2. What is the payback period of the project?
3. What is the profitability index of the project?
4. What is the IRR of the project?
5. What is the NPV of the project?

Answer & Explanation Solved by verified expert

3.9 Ratings (545 Votes)

CONCH REPUBLIC ELECTRONICS 0 1 2 3 4 5 Sales in units of new smart phone 155000 165000 125000 95000 75000 Sales revenue 535 82925000 88275000 66875000 50825000 40125000 Variable cost 220 34100000 36300000 27500000 20900000 16500000 Fixed costs other than depreciation 6400000 6400000 6400000 6400000 6400000 Depreciation 7 Year MACRS 1429 2449 1749 1249 893 Total Depn Book Value Depreciation expense See Answer

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

CASE 4 CONCH REPUBLIC ELECTRONICS Conch Republic Electronics isa 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 originallyrepaired radios and other household appliances. Over the years, thecompany expanded into manufacturing and is now a reputablemanufacturer of various electronic items. Jay McCanless, a recentMBA graduate, has been hired by the company’s financedepartment.One of the major revenue-producing items manufactured by ConchRepublic is a smartphone. Conch Republic currently has onesmartphone model on the market, and sales have been excellent. Thesmartphone is a unique item in that it comes in a variety oftropical 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 withnewer models. Conch Republic spent $750,000 to develop a prototypefor a new smartphone that has all the features of the existingsmartphone but adds new features such as WiFi tethering. Thecompany has spent a further $200,000 for a marketing study todetermine the expected sales figures for the new smartphone.Conch Republic can manufacture the new smartphones for $220 eachin variable costs. Fixed costs for the operation are estimated torun $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 fiveyears, respectively. The unit price of the new smartphone will be$535. The necessary equipment can be purchased for $43.5 millionand will be depreciated on a seven-year MACRS schedule. It isbelieved the value of the equipment in five years will be $6.5million.As previously stated, Conch Republic currently manufactures asmartphone. Production of the existing model is expected to beterminated in two years. If Conch Republic does not introduce thenew smartphone, sales will be 95,000 units and 65,000 units for thenext two years, respectively. The price of the existing smartphoneis $385 per unit, with variable costs of $145 each and fixed costsof $4.3 million per year. If Conch Republic does introduce the newsmartphone, sales of the existing smartphone will fall by 30,000units per year, and the price of the existing units will have to belowered to $215 each. Net working capital for the smartphones willbe 20 percent of sales and will occur with the timing of the cashflows for the year; for example, there is no initial outlay forNWC, but changes in NWC will first occur in Year 1 with the firstyear’s sales. Conch Republic has a 21 percent corporate tax rateand a required return of 12 percent. Shelley has asked Jay toprepare a report that answers the following questions.1. What are operating cash flows from Year 1 to Year 5 of theproject? What are net cash flows for each year? Show details ofyour working.2. What is the payback period of the project?3. What is the profitability index of the project?4. What is the IRR of the project?5. What is the NPV of the project?