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Homework Assignment Set 3
FNCE 312: Corporate Finance
Spring 2021, St. Ambrose University
Due by 11.59 pm, Tuesday, April 20, 2021
Total Points = 25 points
There are two problems below covering the materials from Chapter 10: Making Capital
Investment Decisions and Chapter 11: Project Analysis and Evaluations. Based on the given
case scenario as stated below please answer the relevant questions. You may also need the
concepts developed in Chapter 9 since Chapters 9, 10 and 11 are interrelated.
1. Based on Chapter 10: Making Capital Investment Decisions:
Conch Republic Electronics is a midsized electronics manufacturer located in Key
West, Florida. The company president is Shelley Couts, who inherited the company.
When it was founded over 70 years ago, the company originally repaired radios and
other household appliances. Over the years, the company expanded into
manufacturing and is now a reputable manufacturer of various electronic items. Jay
McCanless, a recent MBA graduate, has been hired by the company’s finance
One of the major revenue-producing items manufactured by Conch Republic is a
smartphone. Conch Republic currently has one smartphone model on the market,
and sales have been excellent. The smartphone 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
smartphone has limited features in comparison with newer models. Conch Republic
spent $750,000 to develop a prototype for a new smartphone that has all the features
of the existing smartphone but adds new features such as WiFi tethering. The
company has spent a further $200,000 for a marketing study to determine the
expected sales figures for the new smartphone.
Conch Republic can manufacture the new smartphones for $220 each in variable
costs. Fixed costs for the operation are estimated to run $6.4 million per year. The
estimated sales volume is 155,000, 165,000, 125,000, 95,000, and 75,000 per year
for the next five years, respectively. The unit price of the new smartphone will be
$535. The necessary equipment can be purchased for $43.5 million and will be
depreciated on a seven-year MACRS schedule. It is believed the value of the
equipment in five years will be $6.5 million.
As previously stated, Conch Republic currently manufactures a smartphone.
Production of the existing model is expected to be terminated in two years. If Conch
Republic does not introduce the new smartphone, sales will be 95,000 units and
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65,000 units for the next two years, respectively. The price of the existing
smartphone is $385 per unit, with variable costs of $145 each and fixed costs of $4.3
million per year. If Conch Republic does introduce the new smartphone, sales of the
existing smartphone will fall by 30,000 units per year, and the price of the existing
units will have to be lowered to $215 each. Net working capital for the smartphones
will be 20 percent of sales and will occur with the timing of the cash flows for the
year; for example, there is no initial outlay for NWC, but changes in NWC will first
occur in Year 1 with the first year’s sales. Conch Republic has a 21 percent corporate
tax rate and a required return of 12 percent.
Shelley has asked Jay to prepare a report that answers the following questions.
a. What is the payback period of the project?
b. What is the profitability index of the project?
c. What is the IRR of the project?
d. What is the NPV of the project?
2. Based on Chapter 11: Project Analysis and Evaluations:
Shelley Couts, the owner of Conch Republic Electronics, has received the capital
budgeting analysis from Jay McCanless for the new smartphone the company is
considering. Shelley is pleased with the results, but she still has concerns about the
new smartphone. Conch Republic has used a small market research firm for the past
20 years, but recently the founder of that firm has retired. Because of this, Shelley
is not convinced the sales projections presented by the market research firm are
entirely accurate. Additionally, because of rapid changes in technology, she is
concerned that a competitor may enter the market. This would likely force Conch
Republic to lower the sales price of its new smartphone. For these reasons, she has
asked Jay to analyze how changes in the price of the new smartphone and changes
in the quantity sold will affect the NPV of the project.
Shelley has asked Jay to prepare a memo answering the following questions.
a. How sensitive is the NPV to changes in the price of the new smartphone?
b. How sensitive is the NPV to changes in the quantity sold of the new smartphone?
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