Payback period, profitability index, IRR and NPV
Conch Republic Electronics
Spent $750,000 to develop a new PDA
Spent an additional $200,000 for marketing study to find expected sales.
Can manufacture new PDA with variable cost for $155.00 each.
Fixed Costs for operation are evaluated at $4.7 million per year.
Unit Price $360.00 each
Essential equipment to produce PDA will cost $21.5 million, with depreciation for seven years MACRS schedule.
It is thought that equipment after five years will be worth $4.1 million.
NWC will be 20% of Sales
Changes in NWC will happen in Year 1, with first year sales.
There is no initial outlay for NWC.
Conch Republic Corporate Tax Rate is 35% and has the 12% required return.
Estimated Sales Volumes:
NWC 20%
Estimated sales volume per year is
1. 74,000
2. 95,000
3. 125,000
4. 105,000
5. 80,000
i) Assess sales in Year 1 and 2, respectively.
ii) Evaluate net cash flows (CF) in Year 1 to Year 5 (Illustrate all calculation steps, comprising breakdown of net sales, net working capital (NWC CF), operating cash flow (OCF) etc.)
iii) Find payback period of project?
iv) Find profitability index of the project?
v) Find IRR of the project?
vi) Find NPV of the project?