Question
In: Finance
Conch Republic can manufacture the new smart phones for $300 each in variable costs. Fixed costs...
Conch Republic can manufacture the new smart phones for $300
each in variable costs. Fixed costs for the operation are estimated
to run $4.3 million per year. The estimated sales volume is 75,000,
95,000, 125,000, 130,000, and 140,000 per year for the next five
years, respectively. The unit price of the new smart phone will be
$650. The necessary equipment can be purchased for $61 million and
will be depreciated on a seven-year MACRS schedule. It is believed
the value of the equipment in five years will be $3.4
million.Shelley believes that the unit sales, variable costs and
equipment cost projections are accurate to ±20%.
Questions:
6. What is the best case NPV, IRR and PBP of the project?
7. What is the worst case NPV, IRR and PBP of the project? What
would be your decision under the worst case scenario?
Please show working using excel:
| Base Case | Best Case | Worst Case | ||||
| 0% | 20% | -20% | ||||
| Change in Unit Sales (%) | ||||||
| Equipment Cost ($) | ||||||
| Variable cost (per unit) | ||||||
| Best Case Scenario | ||||||
| Pro Forma Income Statements | ||||||
| Year | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | |
| Revenues | ||||||
| Variable costs | ||||||
| Fixed costs | ||||||
| Depreciation | ||||||
| EBIT | ||||||
| Taxes (0%) | ||||||
| Net income | ||||||
| OCF | ||||||
| Net Working Capital | ||||||
| Year | Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 |
| Initial NWC | ||||||
| Ending NWC | ||||||
| NWC cash flow | ||||||
| Salvage Value | ||||||
| Market value of salvage | ||||||
| Book value of salvage | ||||||
| Taxes on sale: | ||||||
| Aftertax salvage value: | ||||||
| Project Cash Flows | ||||||
| Year | Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 |
| OCF | ||||||
| Change in NWC | ||||||
| Capital spending | ||||||
| Total cash flow | ||||||
| Cumulative cash flow | ||||||
| Payback Period | ||||||
| NPV | ||||||
| IRR | ||||||
| Worst Case Scenario | ||||||
| Pro Forma Income Statements | ||||||
| Year | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | |
| Revenues | ||||||
| Variable costs | ||||||
| Fixed costs | ||||||
| Depreciation | ||||||
| EBIT | ||||||
| Taxes (0%) | ||||||
| Net income | ||||||
| OCF | ||||||
| Net Working Capital | ||||||
| Year | Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 |
| Initial NWC | ||||||
| Ending NWC | ||||||
| NWC cash flow | ||||||
| Salvage Value | ||||||
| Market value of salvage | ||||||
| Book value of salvage | ||||||
| Taxes on sale: | ||||||
| Aftertax salvage value: | ||||||
| Project Cash Flows | ||||||
| Year | Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 |
| OCF | ||||||
| Change in NWC | ||||||
| Capital spending | ||||||
| Total cash flow | ||||||
| Cumulative cash flow | ||||||
| Payback Period | ||||||
| NPV | ||||||
| IRR | ||||||
| Question 6 | ||||||
| Uncertainty | NPV | IRR | PBP | |||
| Best Case | 20% | |||||
| Question 7 | ||||||
| Uncertainty | NPV | IRR | PBP | |||
| Worst Case | -20% | |||||
| Decision | ||||||
Solutions
Expert Solution
| Macr 7 year Depreciation rate | 14.29 | 24.49 | 17.49 | 12.49 | 8.93 | 8.92 | 8.93 | 4.46 | |
As rate of discounting not given , I assumed it 20%
| Base Case | Best Case | Worst Case | ||||
| 0% | 20% | -20% | ||||
| Change in Unit Sales (%) | $650.00 | $780.00 | $520.00 | |||
| Equipment Cost ($) | ($61,000,000.00) | ($61,000,000.00) | ($61,000,000.00) | |||
| Variable cost (per unit) | ($300.00) | ($360.00) | ($240.00) | |||
| Best Case Scenario | ||||||
| Pro Forma Income Statements | ||||||
| Year | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | |
| Unit od sales | 90000 | 114000 | 150000 | 156000 | 168000 | |
| Revenues | $70,200,000.00 | $88,920,000.00 | $117,000,000.00 | $121,680,000.00 | $131,040,000.00 | |
| Variable costs | ($32,400,000.00) | ($41,040,000.00) | ($54,000,000.00) | ($56,160,000.00) | ($60,480,000.00) | |
| Fixed costs | ($4,300,000.00) | ($4,300,000.00) | ($4,300,000.00) | ($4,300,000.00) | ($4,300,000.00) | |
| Depreciation | ($8,716,900.00) | ($14,938,900.00) | ($10,668,900.00) | ($7,618,900.00) | ($5,447,300.00) | |
| EBIT | $24,783,100.00 | $28,641,100.00 | $48,031,100.00 | $53,601,100.00 | $60,812,700.00 | |
| Taxes (0%) | ||||||
| Net income | $24,783,100.00 | $28,641,100.00 | $48,031,100.00 | $53,601,100.00 | $60,812,700.00 | |
| OCF | $24,783,100.00 | $28,641,100.00 | $48,031,100.00 | $53,601,100.00 | $60,812,700.00 | |
| Net Working Capital | ||||||
| Year | Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 |
| Initial NWC | ||||||
| Ending NWC | ||||||
| NWC cash flow | ||||||
| Salvage Value | ||||||
| Market value of salvage | $3,400,000.00 | |||||
| Book value of salvage | $3,400,000.00 | |||||
| Taxes on sale: | ||||||
| Aftertax salvage value: | $3,400,000.00 | |||||
| Project Cash Flows | $24,783,100.00 | $28,641,100.00 | $48,031,100.00 | $53,601,100.00 | $64,212,700.00 | |
| Year | Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 |
| OCF | ||||||
| Change in NWC | ||||||
| Capital spending | ($61,000,000.00) | |||||
| Total cash flow | $24,783,100.00 | $28,641,100.00 | $48,031,100.00 | $53,601,100.00 | $64,212,700.00 | |
| Cumulative cash flow | $24,783,100.00 | $53,424,200.00 | $101,455,300.00 | $155,056,400.00 | $219,269,100.00 | |
| Payback Period | 2 year 1month 27 days | |||||
| NPV | $218,361,041.09 | |||||
| IRR | 92.614 | |||||
| Worst Case Scenario | ||||||
| Pro Forma Income Statements | ||||||
| Year | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | |
| Units | 60000 | 76000 | 100000 | 104000 | 112000 | |
| Revenues | $46,800,000.00 | $59,280,000.00 | $78,000,000.00 | $81,120,000.00 | $87,360,000.00 | |
| Variable costs | ($21,600,000.00) | ($27,360,000.00) | ($36,000,000.00) | ($37,440,000.00) | ($40,320,000.00) | |
| Fixed costs | ($4,300,000.00) | ($4,300,000.00) | ($4,300,000.00) | ($4,300,000.00) | ($4,300,000.00) | |
| Depreciation | ($8,716,900.00) | ($14,938,900.00) | ($10,668,900.00) | ($7,618,900.00) | ($5,447,300.00) | |
| EBIT | $12,183,100.00 | $12,681,100.00 | $27,031,100.00 | $31,761,100.00 | $37,292,700.00 | |
| Taxes (0%) | ||||||
| Net income | $12,183,100.00 | $12,681,100.00 | $27,031,100.00 | $31,761,100.00 | $37,292,700.00 | |
| OCF | $12,183,100.00 | $12,681,100.00 | $27,031,100.00 | $31,761,100.00 | $37,292,700.00 | |
| Net Working Capital | ||||||
| Year | Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 |
| Initial NWC | ||||||
| Ending NWC | ||||||
| NWC cash flow | ||||||
| Salvage Value | $3,400,000.00 | |||||
| Market value of salvage | $3,400,000.00 | |||||
| Book value of salvage | ||||||
| Taxes on sale: | ||||||
| Aftertax salvage value: | $3,400,000.00 | |||||
| Project Cash Flows | ||||||
| Year | Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 |
| OCF | ||||||
| Change in NWC | ||||||
| Capital spending | ($61,000,000.00) | |||||
| Total cash flow | $12,183,100.00 | $12,681,100.00 | $27,031,100.00 | $31,761,100.00 | $40,692,700.00 | |
| Cumulative cash flow | $12,183,100.00 | $24,864,200.00 | $51,895,300.00 | $83,656,400.00 | $124,349,100.00 | |
| Payback Period | 2year 5 months 18 days | |||||
| NPV | $86,768,062.69 | |||||
| IRR | 54.6398% | |||||
| Question 6 | ||||||
| Uncertainty | NPV | IRR | PBP | |||
| Best Case | 20% | $218,361,041.09 | 92.6140% | 2 year 1month 27 days | ||
| Question 7 | ||||||
| Uncertainty | NPV | IRR | PBP | |||
| Worst Case | -20% | $86,768,062.69 | 54.6398% | 2year 5 months 18 days | ||
| Decision | ||||||
In both senerio , the company have positive NPV so, the project is doable in all condition
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years, respectively. The unit price of the new smart phone will be
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