Conch Republic Electronics
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 more than 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 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 one 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 smartphone for $205 each in variable costs. Fixed costs for the operation are estimated to run $5.1 million per year. The estimated sales volume is 64,000, 106,000, 87,000, 78,000, and 54,000 per year for the next five years, respectively. The unit price of the new smartphone will be $485. The necessary equipment can be purchased for $34.5 million and will be
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 (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 35 percent corporate tax rate and a required return of 12 percent.
Shelly has asked Jay to prepare a report that answers the following questions:
2. What is the profitability index of the project?
Want to see the full answer?
Check out a sample textbook solutionChapter 9 Solutions
ESSENTIALS OF CORPORATE FINANCE
- Conch Republic Electronics is a midsized electronics manufacturer located in Key West, Florida. The companypresident is Shelly Couts, who inherited the company. The company originally repaired radios and other householdappliances when it was founded over 70 years ago. Over the years, the company has expanded, and it is now a reputablemanufacturer of various specialty electronic items. Jay McCanless, a recent MBA graduate, has been hired by thecompany in its finance department.One of the major revenue-producing items manufactured by Conch Republic is a smart phone. Conch Republiccurrently has one smart phone model on the market and sales have been excellent. The smart phone is a unique itemin that it comes in a variety of tropical colors and is preprogrammed to play Jimmy Buffett music. However, as withany electronic item, technology changes rapidly, and the current smart phone has limited features in comparison withnewer models. Conch Republic spent $300,000 to develop a prototype for…arrow_forwardEco Plastics Company has been revolutionizing plastic and trying to do its part to save the environment. Eco’s founder, Marion Cosby, developed a biodegradable plastic that her company is marketing to manufacturing companies throughout the southeastern United States. After operating as a private company for six years, Eco went public in 2009 and is listed on the Nasdaq stock exchange. As the chief financial officer of a young company with lots of investment opportunities, Eco’s CFO closely monitors the firm’s cost of capital. The CFO keeps tabs on each of the individual costs of Eco’s three main financing sources: long-term debt, preferred stock, and common stock. The target capital structure for ECO is given by the weights in the following table: Source of capital weight Long term debt 30 % Preferred stock 20 % Common stock equity 50 % Total 100 % At the present time, Eco can raise debt by selling 20-year bonds with a $1,000 par value and a 10.5%…arrow_forwardEco Plastics Company has been revolutionizing plastic and trying to do its part to save the environment. Eco’s founder, Marion Cosby, developed a biodegradable plastic that her company is marketing to manufacturing companies throughout the southeastern United States. After operating as a private company for six years, Eco went public in 2009 and is listed on the Nasdaq stock exchange. As the chief financial officer of a young company with lots of investment opportunities, Eco’s CFO closely monitors the firm’s cost of capital. The CFO keeps tabs on each of the individual costs of Eco’s three main financing sources: long-term debt, preferred stock, and common stock. The target capital structure for ECO is given by the weights in the following table: Source of capital weight Long term debt 30 % Preferred stock 20 % Common stock equity 50 % Total 100 % At the present time, Eco can raise debt by selling 20-year bonds with a $1,000 par value and a 10.5%…arrow_forward
- The Toledo Shirt Company manufactures men’s shirts sold to department stores and other outlets throughout Ohio, Illinois, and Indiana. For the past 14 years, one of Toledo’s major customers has been Abraham and Sons, a chain of nine stores selling men’s clothing. Mr. Abraham retired 18 months ago and his two sons took complete control of the organization. Since that time, they have invested significant sums of money in an attempt to expand each store by also selling women’s clothing. Success in this new market has proven to be difficult. Abraham and Sons is not known for selling women’s clothing, and no one in the company has much expertise in the area.Approximately seven months ago, James Thurber, Toledo’s chief financial officer, began to notice that Abraham and Sons was taking longer than usual to make payments. Instead of the normal 30 days, the retailer was taking 45 days—and frequently longer—to pay each invoice. Because of the amount of money involved, Thurber began to monitor…arrow_forwardFamily Resorts, Inc., is a holding company for several vacation hotels in the northeastern and mid-Atlantic states. The firm originally purchased several old inns, restored the buildings, and upgraded the recreational facilities. Vacationing families have been well pleased with the inns because many services are provided that accommodate children and afford parents time for themselves. Since the completion of the restoration 10 years ago, the company has been profitable.Family Resorts has just concluded its annual meeting of regional and district managers. This meeting is held each November to review the results of the previous season and to help the managers prepare for the upcoming year. Before the meeting, the managers submitted proposed budgets for their districts or regions as appropriate. These budgets are reviewed and consolidated into an annual operating budget for the entire company. The 2008 budget has been presented at the meeting, and the managers accepted it. To evaluate…arrow_forwardFamily Resorts, Inc., is a holding company for several vacation hotels in the northeastern and Mid-Atlantic states. The firm originally purchased several old Inns, restored the buildings, and upgraded the recreational facilities. Vacationing families have been well pleased with the Inns because many services are provided that accommodate children and afford parents time for themselves. Since the completion of the restoration 10 years ago, the company has been profitable. Family Resorts has just concluded its annual meeting of regional and district managers. This meeting is held each November to review the results of the previous season and to help the managers prepare for the upcoming year. Before the meeting, the managers submitted proposed budgets for their districts or regions as appropriate. These budgets are reviewed and consolidated into an annual operating budget for the entire company. The 2008 budget has been presented at the meeting and the managers accepted it. To…arrow_forward
- NextG Limited is a leading manufacturer of automotive components. It supplies to the original equipment manufacturers as well as the replacement market. Its projects typically have a short life as it introduces new models periodically. You have recently joined NextG Limited as a financial analyst reporting to Mr. Atiamoh, the CFO of the company. He has provided you the following information about two mutually exclusive projects. A and B, that are being considered by the Executive Committee of NextG Limited:Project A is an extension of an existing line. Its cash flow will decrease over time. Project B involves a new product. Building its market will take some time and hence its cash flow will increase over time.The expected net cash flows of the two mutually exclusive projects are as follows. Mr. Atiamoh believes that all the two projects have risk characteristics similar to the average risk of the firm and hence NextG’s cost of capital of 10 percent will apply to them and both…arrow_forwardNextGen Wealth Ltd is a large manufacturing firm Ghana, that was created 20 years ago by Opanin Nsiah’s family. It was initially financed with an equity investment by the Opanin Nsiah family and ten other individuals. Over time, NextGen Wealth Ltd has obtained substantial loans from finance companies and commercial banks. The loans that NextGen Wealth Ltd has obtained from commercial banks stipulate that NextGen Wealth Ltd must receive the banks’ approval before pursuing any large projects. The interest rate on the loans is tied to market interest rates, and is adjusted every six months. Thus, NextGen Wealth Ltd.’s cost of obtaining funds is sensitive to interest rate movements. It has a credit line with a bank in case it suddenly needs to obtain funds for a temporary period. It has purchased Treasury securities that it could sell if it experiences any liquidity problems. NextGen Wealth Ltd has assets valued at about Gh₵50 million and generates sales of about Gh₵100 million per year.…arrow_forwardJohn Snow has recently retired, and he received a large lump sum settlement from his employer. He would like to invest this money to achieve a stable long term income. He is considering investing in the following two companies: Allied Grocers (AG) are a 3-year-old online grocery retailer that specializes in delivering a wide selection of quality food products through an online platform. Beta Solutions (BS) is an established 10-year-old electronics company that is known for selling the most innovative electronic products and software solutions. Selected financial data for 2019 AG BS Average total assets 1,500,000 4,000,000 Average # of common shares outstanding (no preferred shares) 10,000 10,000 Dividends paid 10,000 50,000 Current Market price per share $95 $165 Net sales 1,300,000 6,300,000 Cost of goods sold 900,000 4,200,000 Gross profit 400,000 2,100,000 Operating Expenses: Administrative…arrow_forward
- Davidson Yachts is a small company founded by two businesspeople who are friends and avid sailors. At present, they are interested in expanding the business and have asked you to review its financial statements. Davidson Yachts sells approximately 130 to 180 sailboats each year, ranging from 15-foot dinghies to 21-foot sailboats. Their sales prices range from $2,300 to more than $10,300. The company has a limited inventory of boats consisting primarily of one or two boats from each of the four manufacturers that supply Davidson. The company also sells a variety of supplies and parts and performs different types of service. Most sales are on credit. The company operates from a large building that has offices, storage, and sales space for some of the smaller sailboats. The larger sailboats are kept in a fenced area adjacent to the main building, and an ample parking area is nearby. This year, Davidson purchased a boat lift to haul boats. The lift has brought in revenues for boat…arrow_forwardHappyville, Inc., operates a chain of department stores located in the northwest. The first store began operations in 1965, and the company has steadily grown to its present size of 44 stores. Two years ago, the board of directors of Happyville approved a large-scale remodeling of its stores to attract a more upscale clientele.arrow_forwardRundle Delivery is a small company that transports business packages between New York and Chicago. It operates a fleet of small vans that moves packages to and from a central depot within each city and uses a common carrier to deliver the packages between the depots in the two cities. Rundle Delivery recently acquired approximately $5.5 million of cash capital from its owners, and its president, George Hay, is trying to identify the most profitable way to invest these funds. Todd Payne, the company's operations manager, believes that the money should be used to expand the fleet of city vans at a cost of $720,000. He argues that more vans would enable the company to expand its services into new markets, thereby increasing the revenue base. More specifically, he expects cash inflows to increase by $320,000 per year. The additional vans are expected to have an average useful life of four years and a combined salvage value of $106,000. Operating the vans will require additional working…arrow_forward
- Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
- Foundations Of FinanceFinanceISBN:9780134897264Author:KEOWN, Arthur J., Martin, John D., PETTY, J. WilliamPublisher:Pearson,Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage LearningCorporate Finance (The Mcgraw-hill/Irwin Series i...FinanceISBN:9780077861759Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan ProfessorPublisher:McGraw-Hill Education