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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.
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 one 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 smartphone for $205 each in variable costs. Fixed costs for the operation are estimated to run $5.1 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 smartphone will be $485. The necessary equipment can be purchased for $34.5 million and will be depreciated on a seven-year MACRS schedule. It is believed the value of the equipment in five years will be $5.5 million.
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 (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 35 percent corporate tax rate and a required return of 12 percent.
Shelly has asked Jay to prepare a report that answers the following questions:
QUESTIONS
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What is the payback period of the project?
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What is the profitability index of the project?
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What is the IRR of the project?
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What is the NPV of the project?
Solutions
Expert Solution
| Conch Republic Electronics | ||||||
| Project Details | ||||||
| The prototype development cost of $750,000 and Marketing study cost of $200,000 are sunk costs, | ||||||
| those are already incurred and will not change whteher the project is pursued or not. | ||||||
| Therefore, we can ignore the above two costs. | ||||||
| Depreication as per MACRS | Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 |
| Depreciation Rate | 14.29% | 24.49% | 17.49% | 12.49% | 8.93% | |
| Equipment Cost | 34,500,000 | |||||
| Yearly Depreciation | 4,930,050 | 8,449,050 | 6,034,050 | 4,309,050 | 3,080,850 | |
| Total depreciation in5 years | 26,803,050 | |||||
| Book Value after 5 years | 7,696,950 | |||||
| Salvage value after 5 years | 5,500,000 | |||||
| Capital loss after 5 years | 2,196,950 | |||||
| Tax savings on Capital loss @35% | 768,932.50 | |||||
| Total cash flow from salvage with tax savings | 6,268,932.50 |
| `Sales & NWC Details | Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | |
| Sales Units | 64,000 | 106,000 | 87,000 | 78,000 | 54,000 | ||
| Sales Revenue @$485/unit | 31,040,000 | 51,410,000 | 42,195,000 | 37,830,000 | 26,190,000 | ||
| Annual Variable cost @$205/unit | 13,120,000 | 21,730,000 | 17,835,000 | 15,990,000 | 11,070,000 | ||
| Fixed cost per year | 5,100,000 | 5,100,000 | 5,100,000 | 5,100,000 | 5,100,000 | ||
| Annual Depreciation | 4,930,050 | 8,449,050 | 6,034,050 | 4,309,050 | 3,080,850 | ||
| EBT | 7,889,950 | 16,130,950 | 13,225,950 | 12,430,950 | 6,939,150 | ||
| NWC required @20% of sales | 6,208,000 | 10,282,000 | 8,439,000 | 7,566,000 | 5,238,000 | ||
| Incremental NWC required | 6,208,000 | 4,074,000 | (1,843,000) | (873,000) | (2,328,000) |
| NPV Calulation | Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | |
| Investment in Equipment | (34,500,000) | ||||||
| Incremental NWC investment required | (6,208,000) | (4,074,000) | 1,843,000 | 873,000 | 2,328,000 | ||
| a | Total Initial Investment+ NWC investment in Yr 1-5 | (34,500,000) | (6,208,000) | (4,074,000) | 1,843,000 | 873,000 | 2,328,000 |
| Operating cash flow | |||||||
| EBT | 7,889,950 | 16,130,950 | 13,225,950 | 12,430,950 | 6,939,150 | ||
| Tax @35% | 2,761,482.50 | 5,645,832.50 | 4,629,082.50 | 4,350,832.50 | 2,428,702.50 | ||
| PAT | 5,128,467.50 | 10,485,117.50 | 8,596,867.50 | 8,080,117.50 | 4,510,447.50 | ||
| Add back depreciation | 4,930,050 | 8,449,050 | 6,034,050 | 4,309,050 | 3,080,850 | ||
| b | Total Cash flow from operations | 10,058,517.50 | 18,934,167.50 | 14,630,917.50 | 12,389,167.50 | 7,591,297.50 |
| Terminal Cash flow | |||||||
| Salvage value with Tax benefits on Capital loss | 6,268,932.50 | ||||||
| NWC returned | 5,238,000 | ||||||
| c | Total Terminal Cash flows |
 jeff jeffy answered 2 years agoRelated SolutionsConch 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...
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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...
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 is a midsized electronics manufacturer located in Key West, Florida. The company president...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 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 of the major
revenue-producing...
Conch Republic Electronics is a midsized electronics manufacturer located in Key West, Florida. The company president...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 Electronics is a midsized electronics manufacturer located in Key West, Florida. The company president...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...
Conch Republic Electronics is a midsized electronics manufacturer located in Key West, Florida. The company president...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 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 of the major
revenue-producing...
Conch Republic Electronics is a midsized electronics manufacturer located in Key West, Florida. The company president...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...
Conch Republic Electronics is a midsized electronics manufacturer located in Key West, Florida. The company president...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 of the major...
Conch Republic Electronics is a midsized electronics manufacturer located in Key West, Florida. The company president...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...
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