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 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. Shelley has asked Jay to prepare a report that answers the following questions.

1. What are operating cash flows from Year 1 to Year 5 of the project? What are net cash flows for each year? Show details of your working.

2. What is the payback period of the project?

3. What is the profitability index of the project?

4. What is the IRR of the project?

5. What is the NPV of the project?

Aloma, a university graduate who started a successful business, wants to start an endowment in her name that will provide scholarships to ME students. She wants the scholarship to provide $11,000 per year and expects the first one to be awarded on the day she fulfills the endowment obligation. If Aloma plans to donate $180,000, what rate of return must the university realize in order to award the annual scholarship forever? The rate of return that the university must realize in order to award the annual scholarship forever is--------%.

•As the world is getting more and more connected, will the world become uni-cultural in the near future? Which are the homogenizing and which the hydrogenizing forces in general? And in your home country Finland? How do you see the relation of culture and globalization in light of the recent pandemic (incl. how countries are (re)acting)?

Use the following information to answer the next two questions:

Suppose society consists of two individuals, A and B, who must split a fixed income of $100. Individual A’s marginal utility of income is given by MU_A=400-8I_A and individual B’s marginal utility of income is given by MU_B=800-4I_B.

17. If the social welfare function is given by W=U_A+U_B, then at the optimal distribution of           income, social welfare (W) is _______________.

18. Suppose instead that the social welfare function is given by W=U_A, then at the optimal distribution of income, social welfare (W) is ______________.

Use the following information to answer the next three questions:

Consider an altruistic individual whose utility function is given by U=f(I_self,I_charity). Their marginal benefit of donating to charity (i.e. those in need) is given by MPB=200-I_charity and their marginal cost of donating to charity is given by MPC=4I_charity. This individual’s donations also result in marginal external benefits to third parties (those who benefit from knowing that donations are being made to those in need), given by MEC=5. Using a graph with dollars on the vertical axis and I_charity on the horizontal axis, answer the following questions.

19. This individual will voluntarily donate $ ______________to charity.

20. The deadweight loss associated with this individual voluntarily donating to charity is

      $_____________.

21. To encourage this individual to voluntarily donate the socially efficient amount to charity government would need to offer this individual a tax credit in the amount of $_____________.

Consider a risk averse individual who faces uncertainty with two outcomes: good, bad. The individual has income $360 under good and $90 under bad outcome. The probability of good outcome is 5/9 (so the probability of bad outcome is 1 − 5/9 = 4/9). The individual can buy any non-negative x units of insurance. Every unit of insurance has price $p and it pays $1 in the event of bad outcome.

(a) Suppose the unit price of insurance is p = 1/2. Determine if the insurance market is competitive or not.

(b) Suppose the individual buys x units of insurance. Determine the individual's net income under good income, net income under bad income and the average net income. Draw these three in a diagram as functions of x.

(c) For the individual: (i) compare full insurance with over insurance and (ii) compare full insurance with partial insurance. Then determine best choice of insurance for the individual.

(d) Suppose the individual is risk neutral instead of risk averse. Determine best choice of insurance for the individual.

Consider a risk averse individual who faces uncertainty with two outcomes: good, bad. The individual has income $360 under good and $90 under bad outcome. The probability of good outcome is 5/9 (so the probability of bad outcome is 1 − 5/9 = 4/9). The individual can buy any non-negative x units of insurance. Every unit of insurance has price $p and it pays $1 in the event of bad outcome.

(a) Suppose the unit price of insurance is p = 1/2. Determine if the insurance market is competitive or not.

(b) Suppose the individual buys x units of insurance. Determine the individual's net income under good income, net income under bad income and the average net income. Draw these three in a diagram as functions of x.

(c) For the individual: (i) compare full insurance with over insurance and (ii) compare full insurance with partial insurance. Then determine best choice of insurance for the individual. (d) Suppose the individual is risk neutral instead of risk averse. Determine best choice of insurance for the individual.

Example: 9) An article states that false-positives in polygraph tests (tests in which an individual fails even though he or she is telling the truth) are relatively common and occur about 20% of the time. Suppose that such a test is given to 10 trustworthy individuals. (Round all answers to four decimal places.)

a) What is the probability that all 10 pass?

b) What is the probability that more than 2 fail, even though all are trustworthy?

Example: 9) Suppose that 40% of the students who drive to campus at your university carry jumper cables. Consider the random variable x = number of students who must be stopped before finding a student with jumper cables This is a geometric random variable with p = . Thus the probability distribution of x is p(x) = ( )^x−1 ( ) ^x = 1, 2, 3, . . . Using the above probability distribution find the following probabilities:

a) p(1) =

b) p(2) =

c) P(x ≤ 4) =

c) The article indicated that 500 FBI agents were required to take a polygraph test.

Consider the random variable x = number of the 500 tested who fail.

If all 500 agents tested are trustworthy, what are the mean and standard deviation of x?

1. MINI CASE ANALYSIS on THE TIME VALUE OF MONEY     

Quilici Family: Greg and Debra Quilici own a four bedroom home in an affluent neighborhood just north of San Francisco, California. Greg is a partner in the family owned commercial painting business. The family is Composed of Greg (father), Debra (mother), and 5 year old son Brady.Greg is a partner in the family owned commercial painting business.Debra is a housewife

After visiting Lawrence Krause, a family financial planner, Greg and Debra became concerned of their spending, and that they are not putting enough money for their son’s future education needs as well as their own retirementThey have a Koegh plan (retirement plan for self-employed individuals and small businesses in the US), but they did not account for Brady’s education.

Greg earns $95,000 per year, Greg is an alumnus of Stanford University (Tuition = $40,000 per year). Debra graduated from University of North Carolina at Chapel Hill (Tuition = $4,500 per year). The couple wants to send Brady to either school when he turns 18, with a slight preference towards Stanford. The problem, however, is that with the rate at which tuition is increasing the Quilicis are not sure they can raise enough money.

They expect the following things to happen.

• Tuition fees is expected to increase at an annual rate of 6%
• Living expenses are estimated to be $7000 per year for both schools (expecting to grow 3.5% per year)
• The couple can deposit their money into a growth oriented mutual fund at Neuberger and Berman Management, Inc. (historically earning 12% per annum)

The couple wishes to have a pre-determined monthly amount automatically paid from their bank account. When Brady starts college they will slowly liquidate the account by making an annual payment to Brady to cover tuition and living expenses at the beginning of each year for the four years he will be in college.

From the Case above

1. Identify the variables for each university (Tution Fees, Living Expenses, Interest rate, No of years) (1 Mark for each variable = 4 Marks for Each University, Total for two universities = 8 Marks)

2. How much will the tuition and living expenses be per year when Brady is ready to attend Stanford University?

3. How much will the tuition and living expenses be per year when Brady is ready to attend University of North Carolina at Chapel Hill?

4. Once Brady starts college what will his total expenses (future) be in each of his four years for Stanford University?.

5. Once Brady starts college what will his total expenses (future) be in each of his four years for University of North Carolina at Chapel Hill?.

6. Based on your analysis which university shoulf Greg and Deba choose for their son?

Now that you know all about both Fiscal and Monetary policies, who do you think could do a better job in rescuing us from a recession? Justify your decision!

E13-5 (Compensated Absences) Matt Broderick Company began operations on January 2, 2013. It employs 9 individuals who work 8-hour days and are paid hourly. Each employee earns 10 paid vacation days and 6 paid sick days annually. Vacation days may be taken after January 15 of the year following the year in which they are earned. Sick days may be taken as soon as they are earned; unused sick days accumulate. Additional information is as follows. Actual Hourly Vacation Days Used Sick Days Used Wage Rate by Each Employee by Each Employee 2013 2014 2013 2014 2013 2014 $10 $11 0 9 4 5 Matt Broderick Company has chosen to accrue the cost of compensated absences at rates of pay in effect during the period when earned and to accrue sick pay when earned. E13-6 (Compensated Absences) Assume the facts in E13-5 except that Matt Broderick Company has chosen not to accrue paid sick leave until used, and has chosen to accrue vacation time at expected future rates of pay without discounting. The company used the following projected rates to accrue vacation time. Year in Which Vacation Projected Future Pay Rates Time Was Earned Used to Accrue Vacation Pay- 2013 $10.75 2014 11.60 Instructions (a) Prepare journal entries to record transactions related to compensated absences during 2013 and 2014. (b) Compute the amounts of any liability for compensated absences that should be reported on the balance sheet at December 31, 2013, and 2014.