Conch Republic Electronics, Part 1

Conch Republic Electronics, Part 1Conch Republic Electronics is a midsized electronics manufacturer located in Key West, Florida. The companypresident is Shelley Couts, who inherited the company. When it was founded over 70 years ago, the companyoriginally repaired radios and other household appliances. Over the years, the company expanded intomanufacturing and is now a reputable manufacturer of various electronic items. Jay McCanless, a recent MBAgraduate, has been hired by the company’s finance department. One of the major revenue-producing itemsmanufactured by Conch Republic is a smart phone. Conch Republic currently has one smart phone model onthe market, and sales has been excellent. The smart phone is a unique item in that it comes in a variety oftropical colors and is preprogrammed to play Jimmy Buffet music. However, as with any electronic item,technology changes rapidly, and the current smart phone has limited features in comparison with newermodels. Conch Republic spent $750,000 to develop a prototype for a new smart phone that has all the featuresof the existing smart phone 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 smart phone.Conch Republic can manufacturer the new smart phones for $215 each in variable costs. Fixed costs for theoperation are estimated to run $6.1 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 smart phone will be$250. The necessary equipment can be purchased for $40.5 million and will be depreciated on a seven-yearMACRS schedule. It is believed the value of the equipment in five years will be $6.1 million.As previously stated, Conch Republic currently manufacturers a smart phone. Production of the existing modelis expected to be terminated in two years. If Conch Republic does not introduce the new smart phone, saleswill be 95,000 units and 65,000 units for the next two years, respectively. The price of the existing smart phoneis $380 per unit with variable costs of $145 each and fixed costs of $4.3 million per year. If Conch Republic doesintroduce the new smart phones , sales of the existing smart phone will fall by 30,000 units per year, and theprice of the existing units will have to be lowered to $210 each. Net working capital for the smart phones willbe 20 percent of sales and will occur with the timimg of the cash flows for the year; for example, there is noinitial outlay for NWC, but changes in NWC will first occur in Year 1 with the first year’s sales. Conch Republichas a 35 percent corporate tax rate and a required return of 12 percent.Shelley has asked Jay to prepare a report that answers the following questions.Questions1. 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?