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Conch Republic Electronics is a midsized 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 MBA graduate, has been
hired by the company in its 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 smart phone has limited features in
comparison with newer models. Conch Republic spent $500,000 to develop a prototype for a new smart phone
that has all the features of the existing one 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 phone for $195 each in variable costs. Fixed costs for the
operation are estimated to run $4.1 million per year. The estimated sales volume is 89,000, 126,000, 97,000,
87,000, and 64,000 per year for the next five years, respectively. The unit price of the new smart phone will be
$450. The necessary equipment can be purchased for $30.5 million and will be depreciated on a seven‐year
MACRS schedule. It is believed the value of the equipment in five years will be 2.5 million.
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Net working capital for the smart phones will be 15 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 34 percent corporate tax rate and a required return of 13 percent.
Shelly has asked Jay to prepare a report that answers the following questions
1. What is the payback period of the project?
2. What is the profitability index of the project?
3. What is the IRR of the project?
4. What is the NPV of the project?
5. Perform a sensitivity analysis for the price of the new smart phone. Measure the effects on NPV by
moving price 5% up and down.
6. Perform a sensitivity analysis for the quantity of phones sold. Measure the effects on NPV by moving
quantity 5% up and down.
7. Should Conch Republic produce the new smart phone?
8. Suppose Conch Republic loses sales on other models because of the introduction of the new model. How
would this affect your analysis?
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