Question

***Excel Spreadsheet***

Conch Republic Electronics is a midsized electronics manufacturer located in Key West, Florida. The company president is Shelley Couts, who inherited the company. Over the years, the company expanded into manufacturing and is now a reputable manufacturer of various electronic items. One of the major revenue-producing items manufactured by Conch Republic is a smart phone. Conch Republic currently has one smart phone model on the market, and sales have been excellent. Conch republic spent $750,000 to develop a prototype for a new smart phone that has all the features of their existing smart phones. 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 manufacture the new smart phones 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 smart phone will be $535. The necessary equipment can 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 manufactures a smartphone, production of the existing model is expected 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 smart phone is $385 per unit; with variable cost of $145 and fixed costs of $4.3 million per year. If Conch Republic does introduce the new smartphone, sales of the existing smart phone will fall by 30,000 per unit, and the price of the existing units will have to be lowered to $215 each. Net working capital for the smart phones will be 20 percent of sales and will occur with the timing of the cash flows for the year (i.e., there is no initial outlay for NWC). Changes in NWC will thus first occur in Year 1 with the first year's sales. Conch republic has a 21 percent corporate tax rate and a required rate of 12 percent.

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 =	2.40	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	0.38890	0.28387	0.20720
	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