CHAPTER CASE

CONCH REPUBLIC ELECTRONIC

Conch Republic Electronics is a midsized electron- ics 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 ex-
panded and it is now a reputable manufacturer of vari- ous 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 manu- factured by Conch Republic is a Personal Digital Assistant (PDA). Conch Republic currently has one PDA model on
the market and sales have been excel- lent. The PDA 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 PDA has limited features in comparison with newer models.
Conch Republic spent $750000 to develop a proto- type for a new PDA that has all the features of the existing one but adds new features such as cell phone

capability. The company has spent a further $200000 for a marketing study to determine the expected sales figures for the new PDA.

Conch Republic can manufacture the new PDA for $215 each in variable costs. Fixed costs for the operation are estimated to run $4.3 million per year. The
estimated sales volume is 65000 82000 108000 94000 and 57000 per year for the next five years respectively. The unit price of the new PDA will be
$500. The necessary equipment can be purchased for $32.5 million and will be depre- ciated on a seven-year MACRS schedule. It is be- lieved the value of the
equipment in five years will be $3.5 million.

Net working capital for the PDAs will be 20 per- cent 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%u2019s sales. Conch Republic has a 35 percent cor- porate tax rate and a 12
percent required return.

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. How sensitive is the NPV to changes in the price of the new PDA?

6. How sensitive is the NPV to changes in the quan- tity sold?

7. Should Conch Republic produce the new PDA?

8. Suppose Conch Republic loses sales on other models because of the introduction of the new model. How would this affect your analysis?