Conch Republic Electronics is a midsized electronics manufacturerlocated in Key West, Florida. The company president is ShelleyCouts, who inherited the company. Over the years, the companyexpanded into manufacturing and is now a reputable manufacturer ofvarious electronic items. One of the major revenue-producing itemsmanufactured by Conch Republic is a smart phone. Conch Republiccurrently has one smart phone model on the market, and sales havebeen excellent. Conch republic spent $750,000 to develop aprototype for a new smart phone that has all the features of theirexisting smart phones. The company has spent a further $200,000 fora marketing study to determine the expected sales firgures for thenew smart phone. Conch republic can manufacture the new smartphones for $97 each in variable costs. Fixed costs for theoperation are estimated to run $5.3 million per year. The estimatedsales volume is 68,000, 79,000, 105,000, 83,000, and 64,000 peryear for the next five years, respectively. The unit price of thenew smart phone will be $275. The necessary equipment can bepurchased for $20.5 million and will be depreciated on a seven-yearMACRS schedule. It is believed the value of the equipment in fiveyears will be $3.5 million. Net working capital for the smartphones will be 20 percent of sales and will occur with the timingof the cash flows for the year (i.e., there is no initial outlayfor NWC). Changes in NWC will thus first occur in Year 1 with thefirst year's sales. Conch republic has a 35 percent corporate taxrate and a 12 percent required return.
A.) What is the payback period of the project?
B.) What is the Internal rate of return of the project?
C.) What is the Net present value of the project?
D.) Should Conch Republic produce the new Smart Phone?
Conch Republic Electronics is a midsized electronics manufacturerlocated in Key West, Florida. The company president is ShelleyCouts, who inherited the company. Over the years, the companyexpanded into manufacturing and is now a reputable manufacturer ofvarious electronic items. One of the major revenue-producing itemsmanufactured by Conch Republic is a smart phone. Conch Republiccurrently has one smart phone model on the market, and sales havebeen excellent. Conch republic spent $750,000 to develop aprototype for a new smart phone that has all the features of theirexisting smart phones. The company has spent a further $200,000 fora marketing study to determine the expected sales firgures for thenew smart phone. Conch republic can manufacture the new smartphones for $97 each in variable costs. Fixed costs for theoperation are estimated to run $5.3 million per year. The estimatedsales volume is 68,000, 79,000, 105,000, 83,000, and 64,000 peryear for the next five years, respectively. The unit price of thenew smart phone will be $275. The necessary equipment can bepurchased for $20.5 million and will be depreciated on a seven-yearMACRS schedule. It is believed the value of the equipment in fiveyears will be $3.5 million. Net working capital for the smartphones will be 20 percent of sales and will occur with the timingof the cash flows for the year (i.e., there is no initial outlayfor NWC). Changes in NWC will thus first occur in Year 1 with thefirst year's sales. Conch republic has a 35 percent corporate taxrate and a 12 percent required return.
A.) What is the payback period of the project?
B.) What is the Internal rate of return of the project?
C.) What is the Net present value of the project?
D.) Should Conch Republic produce the new Smart Phone?
