Question
In: Finance
Conch Republic Electronics, Part 1 Conch Republic Electronics is a midsized electronics manufacturer located in Key...
Conch Republic Electronics, Part 1
Conch Republic Electronics is a 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 originally repaired radios and other household appliances. Over the years, the company expanded into manufacturing and is now a reputable manufacturer of various electronic items. Jay McCanless, a recent MBA graduate, has been hired by the company’s finance department.
One of the major revenue-producing items manufactured by Conch Republic is a smartphone. Conch Republic currently has one smartphone model on the market, and sales have been excellent. The smartphone is a unique item in that it comes in a variety of tropical 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 with newer models. Conch Republic spent $750,000 to develop a prototype for a new smartphone that has all the features of the existing smartphone 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 smartphone.
Conch Republic can manufacture the new smartphones 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 smartphone 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 smartphone is $385 per unit, with variable costs of $145 each and fixed costs of $4.3 million per year. If Conch Republic does introduce the new smartphone, sales of the existing smartphone will fall by 30,000 units per year, and the price of the existing units will have to be lowered to $215 each. Net working capital for the smartphones will be 20 percent of sales and will occur with the timing of the cash flows for the year; for example, there is no initial outlay for NWC, but changes in NWC will first occur in Year 1 with the first year’s sales. Conch Republic has a 21 percent corporate tax rate and a required return of 12 percent.
Solutions
Expert Solution
| 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 | $ 3,37,95,150 | $ 97,04,850 | |
| 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 | 95000 | 65000 | ||||||
| Contribution magin at $385-$145 = $240 | $ 2,28,00,000 | $1,56,00,000 | ||||||
| Sales in units with new phone | 65000 | 35000 | ||||||
| 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 | $ 80,25,000 | ||
| 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 | ||
| 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 | ||||||
| PVIF at 12% [PVIF = 1/1.12^n] | 1 | 0.892857143 | 0.797193878 | 0.711780248 | 0.635518078 | 0.567426856 | ||
| PV at 12% | $ 34,09,501 | $2,13,51,173 | $ 2,27,25,692 | $ 1,45,76,059 | $ 1,80,22,342 | $ 8,00,84,768 | ||
| PI = PV of cash inflows/Initial investment = 80084768/43500000 = | 1.84 | |||||||
| IRR: |
 jeff jeffy answered 2 years agoRelated SolutionsConch Republic Electronics Part 1 Conch Republic Electronics is a midsized electronics manufacturer located in Key...Conch Republic Electronics Part 1
Conch Republic Electronics is a 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 originally repaired radios and other
household appliances. Over the years, the company expanded into
manufacturing and is now a reputable manufacturer of various
electronic items. Jay McCanless, a recent MBA graduate, has been
hired by the company's finance department.
One of the...
Conch Republic Electronics Part 1 Conch Republic Electronics is a midsized electronics manufacturer located in Key...Conch Republic Electronics Part 1
Conch Republic Electronics is a 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 originally repaired radios and other
household appliances. Over the years, the company expanded into
manufacturing and is now a reputable manufacturer of various
electronic items. Jay McCanless, a recent MBA graduate, has been
hired by the company's finance department.
One of the...
Conch Republic Electronics, Part 1Conch Republic Electronics is a midsized electronics manufacturer located in Key West,...Conch Republic Electronics, Part 1Conch Republic
Electronics is a 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 originally repaired radios and other household appliances.
Over the years, the company expanded into manufacturing and is now
a reputable manufacturer of various electronic items. Jay
McCanless, a recent MBA graduate, has been hired by the company’s
finance department. One of the major...
Conch Republic Electronics Conch Republic Electronics is a midsized electronics manufacturer located in Key West, Florida....Conch Republic Electronics Conch Republic Electronics is a
midsized electronics manufacturer located in Key West, Florida. The
company president is Shelly Couts, who inherited the company. The
company originally repaired radios and other household appliances
when it was founded over 70 years ago. Over the years, the company
has expanded, and it is now a reputable manufacturer of various
specialty electronic items. Jay McCanless, a recent MBA graduate,
had been hired by the company in its finance department. One of...
Conch Republic Electronics Conch Republic Electronics is a midsized electronics manufacturer located in Key West, Florida....Conch Republic Electronics
Conch Republic Electronics is a midsized electronics
manufacturer located in Key West, Florida. The company president is
Shelly Couts, who inherited the company. The company originally
repaired radios and other household appliances when it was founded
more than 70 years ago. Over the years, the company has expanded,
and it is now a reputable manufacturer of various specialty
electronic items. Jay McCanless, a recent MBA graduate, has been
hired by the company in its finance department.
One...
Learning Assessment Conch Republic Electronics Conch Republic Electronics is a midsized electronics manufacturer located in Key...Learning Assessment
Conch Republic Electronics
Conch Republic Electronics is a 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 originally repaired radios and other
household appliances. Over the years, the company expanded into
manufacturing and is now a reputable manufacturer of various
electronic items. Jay McCanless, a recent MBA graduate, has been
hired by the company's finance department. One of the...
CHAPTER CASE Conch Republic Electronics Conch Republic Electronics is a midsized electronics manufacturer located in Key...CHAPTER CASE
Conch Republic Electronics
Conch Republic Electronics is a midsized electronics
manufacturer located in Key West, Florida. The company president is
Shelly Couts, who inherited the company. The company originally
repaired radios and other household appliances when it was founded
more than 70 years ago. Over the years, the company has expanded,
and it is now a reputable manufacturer of various specialty
electronic items. Jay McCanless, a recent MBA graduate, has been
hired by the company in its finance...
CASE 4 CONCH REPUBLIC ELECTRONICS Conch Republic Electronics is a midsized electronics manufacturer located in Key...CASE 4 CONCH REPUBLIC ELECTRONICS Conch Republic Electronics is
a 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 originally
repaired radios and other household appliances. Over the years, the
company expanded into manufacturing and is now a reputable
manufacturer of various electronic items. Jay McCanless, a recent
MBA graduate, has been hired by the company’s finance
department.
One of the...
Conch Republic Electronics C onch Republic Electronics is a midsized electronics manufacturer located in Key West,...Conch Republic Electronics
C
onch Republic Electronics is a midsized electronics manufacturer
located in Key West, Florida. The company president is Shelly
Couts, who inherited the company. The company originally repaired
radios and other household appliances when it was founded more than
70 years ago. Over the years, the company has expanded, and it is
now a reputable manufacturer of various specialty electronic items.
Jay McCanless, a recent MBA graduate, has been hired by the company
in its finance department....
Case Study 05: Conch Republic Electronics Conch Republic Electronics is a midsized electronics manufacturer located in...
Case Study 05:
Conch Republic Electronics
Conch Republic Electronics is a midsized electronics
manufacturer located in Key West, Florida. The com- pany
president is Shelly Couts, who inherited the com- pany. The
company originally repaired radios and other household appliances
when it was founded more than 70 years ago. Over the years, the
company has expanded, and it is now a reputable manufacturer of
various specialty electronic items. Jay McCanless, a recent MBA
graduate, has been hired by the company...
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
ADVERTISEMENT
|