Case problem – answer all eight questions in an APA paper format.

CHAPTER 9
CONCH REPUBLIC ELECTRONICS
This is an in-depth capital budgeting problem. The initial cash outlay at Time 0 is simply the cost of
the new equipment, $34,500,000. The sales each year are simply the quantity sold times the price,
and the variable costs are the quantity sold times the variable cost per unit. The pro forma income
statement and cash flow will be:
Sales Year 1 Year 2 Year 3 Year 4 Year 5
Sales $31,040,000 $51,410,000 $42,195,000 $37,830,000 $26,190,000
VC 13,120,000 21,730,000 17,835,000 15,990,000 11,070,000
Fixed costs 5,100,000 5,100,000 5,100,000 5,100,000 5,100,000
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
Tax 2,761,483 5,645,833 4,629,083 4,350,833 2,428,703
NI $5,128,468 $10,485,118 $8,596,868 $8,080,118 $4,510,448
+ Depreciation 4,930,050 8,449,050 6,034,050 4,309,050 3,080,850
OCF $10,058,518 $18,934,168 $14,630,918 $12,389,168 $7,591,298
NWC
Beg $0 $6,208,000 $10,282,000 $8,439,000 $7,566,000
End 6,208,000 10,282,000 8,439,000 7,566,000 0
NWC CF –$6,208,000 –$4,074,000 $1,843,000 $873,000 $7,566,000
Net CF $3,850,518 $14,860,168 $16,473,918 $13,262,168 $15,157,298
BV of equipment = $34,500,000 – 4,930,050 – 8,449,050 – 6,034,050 – 4,309,050 – 3,080,850
BV of equipment = $7,696,950
Taxes on sale of equipment = (BV – MV)(TC) = ($7,696,950 – 5,500,000)(.35) = $768,933
CF on sale of equipment = $5,500,000 + 768,933 = $6,268,933
So, the cash flows of the project are:
Time Cash flow
0 –$34,500,000
1 3,850,518
2 14,860,168
3 16,473,918
4 13,262,168
5 21,426,230
1. The payback period is:
Payback period = 2 + ($15,789,315 / $16,473,918)
Payback period = 2.96 years
2. The profitability index is:
Profitability index = [($3,850,518 / 1.12) + ($14,860,168 / 1.122
) + ($16,473,918 / 1.123
) +
($13,262,168 / 1.124
) + ($21,426,230 / 1.125
)] / $34,500,000
Profitability index = 1.380
3. The project IRR is:
IRR: –$34,500,000 = $3,850,518 / (1 + IRR) + $14,860,168 / (1 + IRR)2
+ $16,473,918 / (1 + IRR)3 + $13,262,168 / (1 + IRR)4 + $21,426,230 / (1 + IRR)5
IRR = 23.80%
4. The project NPV is:
NPV = –$34,500,000 + $3,850,518 / 1.12 + $14,860,168 / 1.122 + $16,473,918 / 1.123 +
$13,262,168 / 1.124 + $21,426,230 / 1.125
NPV = $13,096,371.21
5. Here we want to examine the sensitivity of NPV to changes in the price of the new SMART
PHONE. The price at which the “new” NPV is calculated is irrelevant since the sensitivity will be
the same. Assuming a price of $495, the pro forma cash flows will be:
Sales Year 1 Year 2 Year 3 Year 4 Year 5
Sales $31,680,000 $52,470,000 $43,065,000 $38,610,000 $26,730,000
VC 13,120,000 21,730,000 17,835,000 15,990,000 11,070,000
Fixed costs 5,100,000 5,100,000 5,100,000 5,100,000 5,100,000
Depreciation 4,930,050 8,449,050 6,034,050 4,309,050 3,080,850
EBT $8,529,950 $17,190,950 $14,095,950 $13,210,950 $7,479,150
Tax 2,985,483 6,016,833 4,933,583 4,623,833 2,617,703
NI $5,544,468 $11,174,118 $9,162,368 $8,587,118 $4,861,448
+ Depreciation 4,930,050 8,449,050 6,034,050 4,309,050 3,080,850
OCF $10,474,518 $19,623,168 $15,196,418 $12,896,168 $7,942,298
NWC
Beg $0 $6,336,000 $10,494,000 $8,613,000 $7,722,000
End 6,336,000 10,494,000 8,613,000 7,722,000 0
NWC CF –$6,336,000 –$4,158,000 $1,881,000 $891,000 $7,722,000
Net CF $4,138,518 $15,465,168 $17,077,418 $13,787,168 $15,664,298
BV of equipment = $34,500,000 – 4,930,050 – 8,449,050 – 6,034,050 – 4,309,050 – 3,080,850
BV of equipment = $7,696,950
Taxes on sale of equipment = (BV – MV)(TC) = ($7,696,950 – 5,500,000)(.35) = $768,933
CF on sale of equipment = $5,500,000 + 768,933 = $6,268,933
So, the cash flows of the project under this price assumption are:
Time Cash flow
0 –$34,500,000
1 4,138,518
2 15,465,168
3 17,077,418
4 13,787,168
5 21,933,230
The NPV with this sales price is:
NPV = –$34,500,000 + $4,138,518 / 1.12 + $15,465,168 / 1.122 + $17,077,418 / 1.123 +
$13,787,168 / 1.124 + $21,933,230 / 1.125
NPV = $14,886,708.15
And the sensitivity of changes in the NPV to changes in the price is:
ΔNPV/ΔP = ($13,096,371.21 – 14,886,708.15) / ($485 – 495)
ΔNPV/ΔP = $179,033.69
For every dollar change in price of the new SMART PHONE, the NPV of the project changes
$179,033.69 in the same direction.
6. Here we want to examine the sensitivity of NPV to changes in the quantity sold. The calculations for
sensitivity to changes in quantity are similar to the original cash flows. The only difference is that we
will change the quantity sold of the new SMART PHONE. We will increase unit sold by 100 units
per year. Remember that the quantity we choose is irrelevant: The final answer we want, the
sensitivity of NPV to a one unit per year change in sales, will be the same regardless of the quantity
we choose. The projections with the new quantity are:
Sales Year 1 Year 2 Year 3 Year 4 Year 5
Sales $31,088,500 $51,458,500 $42,243,500 $37,878,500 $26,238,500
VC 13,140,500 21,750,500 17,855,500 16,010,500 11,090,500
Fixed costs 5,100,000 5,100,000 5,100,000 5,100,000 5,100,000
Depreciation 4,930,050 8,449,050 6,034,050 4,309,050 3,080,850
EBT $7,917,950 $16,158,950 $13,253,950 $12,458,950 $6,967,150
Tax 2,771,283 5,655,633 4,638,883 4,360,633 2,438,503
NI $5,146,668 $10,503,318 $8,615,068 $8,098,318 $4,528,648
+ Depreciation 4,930,050 8,449,050 6,034,050 4,309,050 3,080,850
OCF $10,076,718 $18,952,368 $14,649,118 $12,407,368 $7,609,498
NWC
Beg $0 $6,217,700 $10,291,700 $8,448,700 $7,575,700
End 6,217,700 10,291,700 8,448,700 7,575,700 0
NWC CF –$6,217,700 –$4,074,000 $1,843,000 $873,000 $7,575,700
Net CF $3,859,018 $14,878,368 $16,492,118 $13,280,368 $15,185,198
BV of equipment = $34,500,000 – 4,930,050 – 8,449,050 – 6,034,050 – 4,309,050 – 3,080,850
BV of equipment = $7,696,950
Taxes on sale of equipment = (BV – MV)(TC) = ($7,696,950 – 5,500,000)(.35) = $768,933
CF on sale of equipment = $5,500,000 + 768,933 = $6,268,933
So, the cash flows of the project under this quantity assumption are:
Time Cash flow
0 –$34,500,000
1 3,859,018
2 14,878,368
3 16,492,118
4 13,280,368
5 21,454,130
The NPV under this assumption is:
NPV = –$34,500,000 + $3,859,018 / 1.12 + $14,878,368 / 1.122 + $16,492,118 / 1.123 +
$13,280,368 / 1.124 + $21,454,130 / 1.125
NPV = $13,158,821.46
So, the sensitivity of NPV to units sold is:
ΔNPV/ΔQ = ($13,158,821.46 – 13,096,371.21) / 100
ΔNPV/ΔQ = $624.50
For a one unit per year change in quantity sold of the new SMART PHONE, the NPV of the project
changes $624.50 in the same direction.
7. Since the NPV is positive, the company should undertake the project.
8. We include the lost sales as a reduction in the sales for the new project. Also, we would need to
reduce the variable costs for thePlease complete, chapter 9 case problem, titled Conch Republic Electronics on page 309 and answer all eight questions in an APA paper format.
Instructions –
This assignment should be done in a term paper format with appropriate appendixes when required. Your paper should demonstrate thoughtful consideration of the ideas and concepts presented in the chapters and provide new thoughts and insights relating directly to this topic. Your response should reflect scholarly writing and current APA standards. Be sure to adhere to University’s Academic Integrity Policy.
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Grading guideline –
• Introduction is attention getting with sufficient background information to establish the topic and a clear thesis statement.
• The main points are each supported by at least 3 solid proofs (quote, statistic, example). The topic is clearly tied to Business Finance. At least one cause is presented followed by clear details for each of the main points. At least one effect is explained based off the main points. The progression is clear and makes sense throughout the paper. The paper should be however long needed to answer all the questions. Paper is written in third person, past tense throughout without any contractions used.
• The conclusion summarizes the main points, and leaves the reader with a strong comprehension of the paper’s significance and the author’s understanding of the problem and case.
• All research is correctly credited
Grammatically correct – No spelling, grammar, or mechanics errors.
lost sales of the existingCHAPTER CASE 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, 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 $750,000 to develop a prototype for a new smart phone that has all the features of the existing one but adds new features such as wifitethering. The company has spent a further $200,000 for a marketing study to determine the expected sales figures for the new smart phone. Conch Republic can manufacture the new smart phone for $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 smart phone 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 smart phones 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:

1. What is the payback period of the project?
2. What is the profitability index of the project?
3. What is the IRR of the project?
4. What is the NPV of the project?
5. How sensitive is the NPV to changes in the price of the new smart phone?
6. How sensitive is the NPV to changes in the quantity sold?

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