Questions:
Conch Republic Electronics is a midsized electronics manufacturer located in Key West, Florida. The company president is Shelley Couts, who inherited the company. Over the years, the company expanded into manufacturing and is now a reputable manufacturer of various electronic items. 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. Conch republic spent $750,000 to develop a prototype for a new smart phone that has all the features of their existing smart phones. The company has spent a further $200,000 for a marketing study to determine the expected sales firgures for the new smart phone. Conch republic can manufacture the new smart phones for $97 each in variable costs. Fixed costs for the operation are estimated to run $5.3 million per year. The estimated sales volume is 68,000, 79,000, 105,000, 83,000, and 64,000 per year for the next five years, respectively. The unit price of the new smart phone will be $275. The necessary equipment can be purchased for $20.5 million and will be depreciated on a seven-year MACRS schedule. It is believed the value of the equipment in five years will be $3.5 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 12 percent required return.
A.) What is the payback period of the project?
B.) What is the Internal rate of return of the project?
C.) What is the Net present value of the project?
D.) Should Conch Republic produce the new Smart Phone?