Logo
Home Study Material Contact Search
AI Chat FREE
  1. business
  2. finance
  3. conch republic electronics is a midsized electroni

Conch Republic Electronics is a midsized electronics manufacturer located in Key West, Florida. The company president...

Free

70.2K

Verified Solution

Question

Finance

Conch Republic Electronics is a midsized electronicsmanufacturer located in Key West, Florida. The company president isShelley Couts, who inherited the company. When it was founded over70 years ago, the company originally repaired radios and otherhousehold appliances. Over the years, the company expanded intomanufacturing and is now a reputable manufacturer of variouselectronic items. Jay McCanless, a recent graduate, has been hiredby the company's finance department. One of the majorrevenue-producing items manufactured by Conch Republic is a smartphone. Conch Republic currently has one smart phone model on themarket, and sales have been excellent. The smart phone is a uniqueitem in that it comes in a variety of tropical colors and ispreprogrammed to play Jimmy Buffett music. However, as with anyelectronic item, technology changes rapidly, and the current smartphone has limited features in comparison with newer models. ConchRepublic spent $750,000 to develop a prototype for a new smartphone that has all the features of the existing smart phone butadds new features such as WiFi tethering. The company has spent afurther $200,000 for a marketing study to determine the expectedsales figures for the new smart phone. Conch Republic canmanufacture the new smart phones for $215 each in variable costs.Fixed costs for the operation are estimated to run $6.1 million peryear. 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 smart phone will be $520. The necessaryequipment can be purchased for $40.5 million and will bedepreciated on a seven-year MACRS schedule. It is believed thevalue of the equipment in five years will be $6.1 million. Networking capital for the smart phones will be 20 percent of salesand will occur with the timing of the cash flows for the year; forexample, there is no initial outlay for NWC, but changes in NWCwill first occur in Year 1 with the first year's sales. ConchRepublic has a 35 percent corporate tax rate and a required returnof 12 percent. Shelley has asked Jay to prepare a report thatanswers the following questions.

Create Pro Forma Income Statement from YEAR 1 to 5 (Show EBITDAand EBIT).

Answer & Explanation Solved by verified expert
4.5 Ratings (646 Votes)

1) INCOME STATEMENT: 0 1 2 3 4 5
New smart phone sales in units 155000 165000 125000 95000 75000
Sales revenue (at $520) 80600000 85800000 65000000 49400000 39000000
Variable cost (at $215) 33325000 35475000 26875000 20425000 16125000
Fixed cost 6100000 6100000 6100000 6100000 6100000
EBITDA 41175000 44225000 32025000 22875000 16775000
Depreciation (MACRS) 5787450 9918450 7083450 5058450 3616650 31464450
EBIT 35387550 34306550 24941550 17816550 13158350
Tax at 35% 12385643 12007293 8729543 6235793 4605423
NOPAT 23001908 22299258 16212008 11580758 8552928
OPERATING CASH FLOW STATEMENT:
NOPAT 23001908 22299258 16212008 11580757.5 8552927.5
Add: Depreciation 5787450 9918450 7083450 5058450 3616650
OCF (New smart phone) 28789358 32217708 23295458 16639208 12169578
CHANGE IN NWC:
NWC required (for new phone) 16120000 17160000 13000000 9880000 7800000
Investment in NWC 16120000 1040000 -4160000 -3120000 -9880000
Capital expenditure 40500000 -7127443 (See note below)
FCF -40500000 12669358 31177708 27455458 19759207.5 29177020.5
CALCULATION OF NPV:
FCF -40500000 12669358 31177708 27455458 19759207.5 29177020.5
PVIF at 12% 1 0.892857 0.7971939 0.71178 0.63551808 0.56742686
PV at 12% -40500000 11311926 24854678 19542252 12557333.6 16555825
NPV 44322015
WORKINGS:
Loss on sale of equipment at t5:
Book value of the equipment = 40500000-31464450 = 9035550
Amount realized 6100000
Loss on sale 2935550
Tax shield on loss at 35% 1027443
Net cash flow after tax = 6100000+1027443 = 7127443

RECOMMENDATION;

As the NPV is positive the project can be undertaken.
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

Conch Republic Electronics is a midsized electronicsmanufacturer located in Key West, Florida. The company president isShelley Couts, who inherited the company. When it was founded over70 years ago, the company originally repaired radios and otherhousehold appliances. Over the years, the company expanded intomanufacturing and is now a reputable manufacturer of variouselectronic items. Jay McCanless, a recent graduate, has been hiredby the company's finance department. One of the majorrevenue-producing items manufactured by Conch Republic is a smartphone. Conch Republic currently has one smart phone model on themarket, and sales have been excellent. The smart phone is a uniqueitem in that it comes in a variety of tropical colors and ispreprogrammed to play Jimmy Buffett music. However, as with anyelectronic item, technology changes rapidly, and the current smartphone has limited features in comparison with newer models. ConchRepublic spent $750,000 to develop a prototype for a new smartphone that has all the features of the existing smart phone butadds new features such as WiFi tethering. The company has spent afurther $200,000 for a marketing study to determine the expectedsales figures for the new smart phone. Conch Republic canmanufacture the new smart phones for $215 each in variable costs.Fixed costs for the operation are estimated to run $6.1 million peryear. 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 smart phone will be $520. The necessaryequipment can be purchased for $40.5 million and will bedepreciated on a seven-year MACRS schedule. It is believed thevalue of the equipment in five years will be $6.1 million. Networking capital for the smart phones will be 20 percent of salesand will occur with the timing of the cash flows for the year; forexample, there is no initial outlay for NWC, but changes in NWCwill first occur in Year 1 with the first year's sales. ConchRepublic has a 35 percent corporate tax rate and a required returnof 12 percent. Shelley has asked Jay to prepare a report thatanswers the following questions.Create Pro Forma Income Statement from YEAR 1 to 5 (Show EBITDAand EBIT).

Other questions asked by students