Question

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 $1.2 million 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 $250,000 for a marketing study to determine the expected sales firgures for the new smart phone. Conch republic can manufacture the new smart phones 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 smart phone 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 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 22 percent corporate tax rate and a required rate of 12 percent.

What is the payback period?

What is the profitability index?

What is the IRR of the Project?

What is the NPV of the project?

Answer 1

Calculation of NPV
Year	0	1	2	3	4	5	6
Initial Investment (1)	39700000
Sales Volume (2)		64000	106000	87000	78000	54000
Selling Price (3)		515	515	515	515	515
Sales Revenue (4)		32960000	54590000	44805000	40170000	27810000
Variable Cost (5)		13440000	22260000	18270000	16380000	11340000
Fixed Cost (6)		5300000	5300000	5300000	5300000	5300000
Operating Profit (4-5-6)		14220000	27030000	21235000	18490000	11170000
Depriciation (W.Note) (7)		5501650	9428650	6733670	4808650	3438050
Operating Profit After Depreciation (4-5-6-7)		8718350	17601350	14501330	13681350	7731950
Tax @ 22% (8)		1918037	3872297	3190293	3009897	1701029
Depreciation (9)		5501650	8081296	4357993	2567827	1606617
Net Working Capital (W. Note 2) (10)		6592000	4326000	-1957000	-927000	-2472000	-5562000
Salvage Value (11)		-	-	-	-	6413657	-
Cash Flows After Tax (4-5-6-8+9-10+11)	-39700000	5709963	17484349	17626030	14166280	10109538	5562000
PVF	1	0.893	0.797	0.712	0.636	0.567	0.507
Present Value	-39700000	5098997	13935026	12549734	9009754	5732108	2819934
Hence NPV of the project is $ 9.44

W. Note 1 : Depreciation Schedule
Year	Opening Balance	Depreciation Rate	Depreciation	Closing Balance
1	38500000	14.29%	5501650	32998350
2	38500000	24.49%	9428650	23569700
3	38500000	17.49%	6733650	16836050
4	38500000	12.49%	4808650	12027400
5	38500000	8.93%	3438050	8589350

W. Note 2 : Net Working Capital
Year	1	2	3	4	5
Net Working Capital Required	6592000	10918000	8961000	8034000	5562000
Increase in Working Capital	6592000	4326000	-1957000	-927000	-2472000