CAPITAL BUDGETING Conch Republic Electronics is a midsized electronics manufacturer located in Key West, Florida. The co

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CAPITAL BUDGETING 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,
has been hired by the company in its 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 $400,000 to develop a prototype for a new smart
phone that has all the features of the existing one but adds new
features such as wifi tethering. The company has spent a further
$250,000 for a marketing study to determine the expected sales
figures for the new smart phone. Conch Republic can manufacture the
new smart phone for $150 each in variable costs. Fixed costs for
the operation are estimated to run $10 million per year. The
estimated sales volume is 100,000, 120,000, 90,000, , and 75,000
per year for the next four years, respectively. The unit price of
the new smart phone will be $300. The necessary equipment can be
purchased for $9.5 million and will be depreciated on a seven‐year
MACRS schedule. It is believed the value of the equipment in four
years will be 2.2 million. Net working capital for the smart phones
will be 18 percent of next year sales. Conch Republic has a 32
percent corporate tax rate and a required return of 13 percent.
Shelly has asked Jay to prepare a report that answers the following
questions: QUESTIONS 1. What is the payback period of the project?
2. What is the profitability index of the project? 3. What is the
IRR and MIRR of the project? 4. What is the NPV of the project? 5.
Perform a sensitivity analysis for the price of the new smart
phone. Measure the effects on NPV by moving each price 5% up and
down. 6. Perform a sensitivity analysis for the unit cost. Measure
the effects on NPV by moving cost 5% up and down. 7. Should Conch
Republic produce the new smart phone? 8. Suppose Conch Republic
loses sales on other models because of the introduction of the new
model. How would this affect your analysis?