CONCH REPUBLIC ELECTRONICS Corp.1 Conch (pronounced “konk”) Republic Electronics Corp. is a mid-sized electronics manufacturer located in Key West, Florida. The company president is Shelly Couts, who inherited the company. The company originally repaired radios and other household appliances when it was founded over 70 years ago. Over the years, the company has expanded and it is now a reputable manufacturer of various specialty electronic items. Jay McCanless, a recent Finance graduate, has been hired by the company in its finance department.
One of the major revenue-producing items manufactured by Conch Republic is an MP3 Player. Conch Republic currently has one MP3 Player model on the market and sales have been excellent. This player is a unique item in that it comes in a variety of tropical colors and is pre-programmed to play Jimmy Buffet music. However, as with any electronic item, ...view middle of the document...
The estimated sales volume is given in Table 1:
Year Units Sales Price
2011 70,000 $250
2012 80,000 $250
2013 100,000 $250
2014 85,000 $250
2015 75,000 $250
Conch Republic can sell the new unit for $250 each, and expects that the price will remain the same over the product lifecycle, through the year 2015. The necessary manufacturing equipment can be purchased for $15 million, and will be depreciated on a 7-year MACRS schedule. The company believes that after five years, this same equipment can be sold for $3 million. The project, if accepted, will require additional investments in working capital to be contributed each year. Total working capital for the project will be approximately 20
Updated 2011: Adapted by D.Fricke, 2011, from Ross, Westerfield, and Jordan: “Conch Republic Electronics,” in Essentials of Corporate Finance 5e. McGrawHill/Irwin, New York: 2007.
percent of sales, and the timing of the investment in working capital will occur at the beginning the year (i.e., There is the initial outlay for working capital at Time = 0 is based upon the sales forecast for the first year, with incremental outlays each year.) Changes in Net Working Capital will thus first occur in Year 1, based on the next year’s sales. Conch Republic has a 35 percent corporate tax rate (combined, State and Federal), and they require a 20 percent return on projects of this risk and nature. Shelly has asked Jay to prepare a report that answers the following questions: 1. What is the NPV of this project? 2. What is the IRR of this project? 3. Should Conch Republic produce the new PDA on the basis of the current cash flow estimates? 4. How sensitive is the NPV to changes in the selling price of the new PDA? That is, at what selling price would Conch Republic change their answer to Question #3? 5. How sensitive is the NPV to changes in the quantity sold of the new PDA? That is, at what unit quantity would Conch Republic change their answer to Question #3? 6. Suppose that Conch Republic loses sales of their previous models because of the introduction of the new model. How would this affect your analysis?