Reference no: EM132597001

Conch Republic Electronics is a midsized electronics manufacturer located in Key West, Florida. The company president is Shelley Couts, who inherited the company. When it was founded over 70 years ago, the company originally repaired radios and other household appliances. Over the years, the company expanded into manufacturing and is not reputable manufacturer of various electronic items. Jay McCanlen, a recent MBA graduate, has been hired by the company's 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 smartphone has limited features in comparison with new models. Conch Republic spent $750,000 to develop a prototype for a new smart phone that has all the features of the existing smart phone 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 phones for $215 each in variable costs. Fixed costs for the operation (excluding depreciation) are estimated to run $6.1 million per year. The estimated sales volume is 155,000, 165,000, 125,000, 95,000 and 75,000 per year for next five years, respectively. The unit price of new smart phone will be $520. The necessary equipment can be purchased for $40.5 million and will be depreciated on seven-year MACRS schedule. It is believed the value of the equipment in five years will be $6.1 million.

• As previously stated, Conch Republic currently manufactures a smart phone. Production of the existing model is expected to be terminated in two years. If Conch Republic does not introduce the new smart phone, sales will be 95,000 units and 65,000 units for the next two years, respectively. The price of existing smart phone is $380 per unit, with variable cost of $145 each. If Conch Republic does introduce the new smart phone, sales of existing smart phone will fall by 30,000 units per year, and the price of the existing units will have to be lowered to $210 each. Net working for the project is $15 million. Conch Republic has a 35% corporate tax rate and required return of 12%

Required Questions:

Question 1. How will you treat the given financials from the existing smart phones?

Question 2. Calculate the cash flows for the project. Clearly show all supporting calculations.

Question 3. Calculate the NPV of the project.