Case Conch Republic Electronics, from essential of Corporate finance edition.
The company sells electronics such as smart phones which has being very successful sellers. However, as with any electronic item, technology changes rapidly. So the company spent $750,000 to developed a prototype for a new smart phone with new features. The company has spent a further $200,000 for a marketing study to determine the expected sales in the new item. They can manufacture the new phone for $205 each in variable cost. Fixed costs are estimated $5.1 million per year. The estimated sales volume is 64,000, 106,000, 87,000, 78,000, and 54,00 per year for the next five years. The unit price will be $485. The necessary equipment can be purchase for $34.5 million and will be depreciated on a 7 year MACRS schedule. The value of the equipment in 5 years will be $5.5 million. NWC for the new phone will be 20% of sales and will occur with the timing of the cash flow for the year. Changes in the NWC will occur in the year 1 with the first's year sale. Conch Republican has 35% corporate tax rate and a requirement return of 12%.
1) What is the Net Present Value for the project?
2) How sensitive is the NPV to changes in the price of the new smart phone?