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 smart
phone. Conch Republic currently has one smart phone model on the market, and sales have been
excellent. The smart phone 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 smart phone has limited features in comparison with newer models.
Conch Republic spent $750,000 to develop a prototype for a new smart phone that has all the
features of the existing smart phone 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 smart phone. Page 349 Conch Republic can manufacture the new smart phones for $215 each
in variable costs. Fixed costs for the operation are estimated to run $6.1 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 smart phone will be $520. The necessary equipment
can be purchased for $40.5 million and will be depreciated on a seven-year MACRS schedule. It is
believed the value of the equipment in five years will be $6.1 million. As previously stated, Conch
Republic currently manufactures a smart phone. Production of the existing model is expected to be
terminated in two years. If Conch Republic does not introduce the new smart phone, sales will be
95,000 units and 65,000 units for the next two years, respectively. The price of the existing smart
phone is $380 per unit, with variable costs of $145 each and fixed costs of $4.3 million per year. If
Conch Republic does introduce the new smart phone, sales of the existing smart phone will fall by
30,000 units per year, and the price of the existing units will have to be lowered to $210 each. 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; 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 35 percent corporate tax rate and a
required return of 12 percent. Shelley has asked Jay to prepare a report that answers the following
questions.
QUESTIONS
What is the payback period of the project?

What is the profitability index of the project?

What is the IRR of the project?
What is the NPV of the project?
show your calculations pleaseeeeee........

1.Payback period of the project = 2 + (14,647,024/16,601,488) = 2.9 years

2.PV of Inflow =$3,903,337.50+10,747,160.40+11,816,611.24+11,082,951.02+7,081,508.72
=$44,631,568.88PV of Outflow = $32,500,000Profitability Index = PV of Inflow/PV of
OutflowPI = 44,631,568.88/32,500,000= 1.3733
3.IRR

of

the

project

=0

-$32,500,000

(4,371,738/1+IRR)

+(13,481,238/1+IRR^2)+(16,601,488/1+IRR^3)+(17,439,238/1+IRR^4)+(12,480,038/1+IRR^5)
= 0.291IRR = 29.1%4
4.NPV

of

the

project

-$32,500,000

+(4,371,738/1.12)

+(13,481,238/1.12^2)

+(16,601,488/1.12^3)+(17,439,238/1.12^4)+(12,480,038/1.12^5)= $41,381,569
5. For each dollar change in the price, the projects NPV will change 184 462,16 $ via the exact
same direction. To examine the sensitivity of the NPV to changes by the price I calculated a price
of 510 $ for unit price. For complete calculation please see the attachment on page 2.
6. For one unit per year change in sold quantity, the projects NPV will change 635,24 $ via same
direction. To examine the sensitivity of the NPV to changes in the quantity sold, I calculated that
we will increase 150 units sold per year. For complete calculation please see the attachment on
page 2.

7. Conch should have produce the new PDA because it has a positive NPV. Through a marketing
strategy, Conch Republic had determined two important factors in the new product investment.
They have determined that a new PDA will cost 500 $ and estimated sales of the new PDA over
the next 5 years to be 65 000, 82 000, 108 000, 94 000 and 57 000 units. According those
background materials, above there are recommendation that the new PDA should be profitable.
8. The decision to introducing the new PDA on a market would however result, that the Conch
Republic will lost sales on their older versions of established versions of PDA. Result of
launching a new PDA would affect cash flows, so in this case, the cash flow should be adjusted
downward to reflect lost profits on the older versions.