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Payback period, profitability index, IRR, NPV

Conch Republic Electronics

Spent $750,000 to develop a prototype (or Model) for a new PDA
Spent an additional $200,000 for marketing study to determine the expected sales.
Can manufacture the new PDA with variable cost for $97.00 each.
Fixed Costs for the operation are estimated at $3.4 million per year.
Unit Price $275.00 each
Necessary equipment to produce the PDA will cost $20.5 million, with depreciation for 7 years MACRS schedule.
It is believed that this equipment after 5 years will be worth $3.5 million.
NWC will be 20% of Sales
Changes in NWC will occur in Year 1, with the first year sales.
There is no initial outlay for NWC.
Conch Republic Corporate Tax Rate is 35% and has a 12% required return.

Estimated Sales Volumes:
NWC 20%

Estimated sales volume per year is
1. 68,000
2. 79,000
3. 105,000
4. 83,000
5. 64,000

2. Calculate payback period, profitability index, IRR, NPV.

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

4. How sensitive is the NPV to changes in the quantity sold?

5. Should they produce the new PDA?

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

Solution Summary

The solution explains the calculation of payback period, profitability index, IRR and NPV