Conch Republic Electronics is a midsize electo nice manufacturer located in Key West, FL. One of the major revenue producing items manufactured by Conch Republic is a smart phone. Conch Republic currently has one smart phone on the market and sales have been excellent. 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 model, 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. The company also projects to incur $1M financing costs. The necessary equipment to manufacture the new smart phone can be purchased for $38.5M and will be depreciated on a seven-year MACRS schedule. It is expected to be sold at $5.4M in five years.
Conch Republic can manufacture the new smart phones for $185 each in variable costs. Fixed costs are estimated to run $5.3M per year. The estimated sales volume is 74,000, 95,000, 125,000, 105,000 and 80,000 per each yeah for the next five years, respectively. The unit price of the new smart phone will be $480. Based on the information, the operating cash flows are estimated to be $9,387,578, $15,243,778, $22,880,528, $18,371,778 and $13,098,318 for the next five years, respectively. The net working capital to manufacture the new smart phones is estimated to be $7.5M and will occur from year 0 to year 4. Conch Republic has a 35% corporate tax rate and a 12% required return.
Rob Lucas has been hired by the companies finance department. He was asked to prepare a report that answers the following questions:
1. Please identify the relevant cash flows to analyze this project.
2. Based on the forecasted cash flows, what is the NPV of the project?
3. Based on the forecasted cash flows, what is the IRR of the project?
4. Based on the forecasted cash flows, what is the profitability index of the project?
5. Based on the forecasted cash flows, will hat is the payback period of the project?
6. Based on the forecasted cash flows, what is the discounted payback period of the project?
7. Should Rob Lucas recommend this project to his boss?