Learning Assessment Conch Republic Electronics Conch Republic Electronics is a midsized electronics manufacturer located in Key West, Florida....

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Finance

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Conch Republic Electronics
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 MBA graduate, has beenhired by 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 $1,000,000 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, dual cameras, and largerscreen. The company has spent a further $400,000 for a marketingstudy to determine the expected sales figures for the new smartphone. Conch Republic can manufacture the new smart phones for $550each in variable costs. Fixed costs for the operation are estimatedto run $6.1 million per year. The estimated sales volume is205,000, 215,000, 175,000, 125,000, and 75,000 per year for thenext five years, respectively. The unit price of the new smartphone will be $799. The necessary equipment can be purchased for$40.5 million and will be depreciated on a seven-year MACRSschedule. It is believed the value of the equipment in five yearswill be $6.1 million. As previously stated, Conch Republiccurrently manufactures a smart phone. Production of the existingmodel is expected to be terminated in two years. If Conch Republicdoes not introduce the new smart phone, sales will be 95,000 unitsand 65,000 units for the next two years, respectively. The price ofthe existing smart phone is $699 per unit, with variable costs of$350 each and fixed costs of $4.3 million per year. If ConchRepublic does introduce the new smart phone, sales of the existingsmart phone will fall by 35,000 units per year, and the price ofthe existing units will have to be lowered to $499 each. Networking capital for the smart phones will be 25 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 18 percent. Shelley has asked Jay to prepare a report thatanswers the following questions:
A. What is the payback period of the project?
B. What is the discounted payback period of the project?
C. What is the IRR of the project?
D. What is the net present value of the project?
E. At what selling price would the company be indifferent totaking on the project? (NPV = 0)
F. At what variable cost would the company be indifferent totaking on the project? (NPV = 0)
G. What recommendation would they make based on the pro-formastatements?
I have a spreadsheet started with values included but I'm stuckand don't know where to go next.

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3.8 Ratings (409 Votes)

CONCH REPUBLIC ELECTRONICS 0 1 2 3 4 5 Sales in units of new smart phone 205000 215000 175000 125000 75000 Sales revenue 799 163795000 171785000 139825000 99875000 59925000 Variable cost 550 112750000 118250000 96250000 68750000 41250000 Fixed costs other than depreciation 6100000 6100000 6100000 6100000 6100000 Depreciation 7 Year MACRS 1429 2449 1749 1249 893 Total Depn Book Value Depreciation expense 5787450 9918450 7083450 5058450 3616650 31464450 9035550 EBIT New smart phone 39157550 37516550 30391550 19966550 8958350 Contribution lost on existing smart phone Sales in units without new phone 95000 65000 See Answer

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Transcribed Image Text

Learning AssessmentConch Republic ElectronicsConch 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 MBA graduate, has beenhired by 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 $1,000,000 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, dual cameras, and largerscreen. The company has spent a further $400,000 for a marketingstudy to determine the expected sales figures for the new smartphone. Conch Republic can manufacture the new smart phones for $550each in variable costs. Fixed costs for the operation are estimatedto run $6.1 million per year. The estimated sales volume is205,000, 215,000, 175,000, 125,000, and 75,000 per year for thenext five years, respectively. The unit price of the new smartphone will be $799. The necessary equipment can be purchased for$40.5 million and will be depreciated on a seven-year MACRSschedule. It is believed the value of the equipment in five yearswill be $6.1 million. As previously stated, Conch Republiccurrently manufactures a smart phone. Production of the existingmodel is expected to be terminated in two years. If Conch Republicdoes not introduce the new smart phone, sales will be 95,000 unitsand 65,000 units for the next two years, respectively. The price ofthe existing smart phone is $699 per unit, with variable costs of$350 each and fixed costs of $4.3 million per year. If ConchRepublic does introduce the new smart phone, sales of the existingsmart phone will fall by 35,000 units per year, and the price ofthe existing units will have to be lowered to $499 each. Networking capital for the smart phones will be 25 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 18 percent. Shelley has asked Jay to prepare a report thatanswers the following questions:A. What is the payback period of the project?B. What is the discounted payback period of the project?C. What is the IRR of the project?D. What is the net present value of the project?E. At what selling price would the company be indifferent totaking on the project? (NPV = 0)F. At what variable cost would the company be indifferent totaking on the project? (NPV = 0)G. What recommendation would they make based on the pro-formastatements?I have a spreadsheet started with values included but I'm stuckand don't know where to go next.