Question

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 figure manufacturer of various specialty electronic items. Jay McCanless, a recent MBA graduate, has been hired by the company in its finance department.

One of the major revenue-producing items manufactured by Conch Republic is a Personal Digital Assistant (PDA). Conch Republic currently has one PDA model on the market and sales have been excellent. The PDA 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 PDA has limited features in comparison with newer models. Conch Republic spent $1.2 million to develop a prototype for a new PDA that has all the features of the existing one, but adds new features such as cell phone capability. The company has spent a further $250,000 for a marketing study to determine the expected sales figures for the new PDA.

Conch Republic can manufacture the new PDA for $210 each in variable costs. Fixed costs for the operation are estimated to run $5.3 million per year. The estimated sales volume is 64,000, 106,000, 87,000, 78,000, and 54,000 per year for the next five years, respectively. The unit price of the new PDA will be $515. The necessary equipment can be purchased for $38.5 million and will be depreciated on a seven-year MACRS schedule. It is believed the value of the equipment in five years will be $5.8 million.

Net working capital for the PDAs 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 22 percent corporate tax rate and a 12 percent required return.

What is the payback period?

What is the profitability index?

What is the IRR of the project?

What is the NPV of the project?

Show all work.

Answer 1

Seven Year MACR Dep Schedule for Equipment:

This is a depreciation scheme under the IRS rule which allow to depreciate the property according to its use and efficiency. Generally Assets are used more in initial day of instalation and during the initial years it productivuity is more in comparision to later part of its life. Hence during the initial year of useful life of the assets more depreciation benefit should be given. Hence its a table which provided you the depreciation rate on the basis of assets nature use and estimated life of the assets. But In absence of Rate Table I Used the Simple Straight Line Mathod of Depreciation for calculating the required figures.

Pay Back Period: It is a period which determined that in how much time period company will able to recover the initial outflow investment in project from the project cash inflow. To Calculate this we do not considerd the Present Value factor of the money.

Profitability Index: Its a Present Value of Net anuual Cash flow from the project divided by the initial investment in the project.

IRR: It is rate which estimate that at what rate company net presnt value of the project will be equal to ZERO. In Answer it is 15%, it means effective rate of interest for the project is 15%.