Conch Republic Electronics
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 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 $750,000 to develop a prototype for a new smart phone that has all the features of the existing smart phone 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 smart phone.
Conch Republic can manufacture the new smart phones for $185 each in variable costs. Fixed costs for the operation are estimated to run $5.3 million per year. The estimated sales volume is 74,000, 95,000, 125,000, 105,000 and 80,000 per year for the next five years, respectively. The unit price of the new smart phone will be $480. The necessary equipment can be purchased for $38.5 million and will be depreciated on a seven-years MACRS schedule. It is believed the value of the equipment in five years will be $5.4 million.
As previously stated, Conch Republic currently manufactures a smart phone. Production of the existing model is expected to be terminated in two years. If Conch Republic dose not introduce the new smart phone, sales will be 80,000 units and 60,000 units for the next two years , respectively. The price of the existing smart phone is $310 per unit, with variable costs of $125 each and fixed costs of $1,800,000 per year. If Conch Republic dose introduce the new smart phone, sales of the existing smart phone will fall by 15,000 units per year, and the price of the existing units will have to be lowered to $275 each. Net working capital for the smart phones 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 35 percent corporate tax rate and a 12 percent required return.
Shelley has asked Jay to prepare a memo answering the following questions.
- Is the project attractive to be chosen by the company? Use sufficient tools for your recommendation? Define the criteria that we should use to make the decision ? ( Performance area 1)
- How long the company will wait for before being able to bring back what it has been paid in the project? Do you see this time appropriate, given the company current status? What are the criteria that need to be considered to decide on the appropriateness of this time? Explain How do you developing the approach used to solve the problem ? ( Performance area 2)
- What are some more sophisticated measures that you can use to decide on the feasibility of this project?Show clearly using excel files your detailed Procedures. ( Performance area 3)
- How Risk can be considered in your recommendation? Show your detailed solving for the problem and your recommendation.( Performance area 4)
Note: All calculation for cash flows and evaluation criteria should done by Excel. The excel file should be submitted with the case study report.
Note: you answer will be graded based on the criteria listed in the below Table.
LO4. Apply appropriate problem-solving methodologies to the analysis and solution of financial problems
|Performance Area||1: Does Not Meet Expectations||2: Needs Improvement||3: Meets Expectations||4: Above Expectations||Score|
|Defining and understanding the Problem||Fails to understand or identify the problem.||Defines the problem but fails to identify the underlying elements necessary to solve the problem||Defines adequately the problem, but partially identifies underlying issues and elements necessary to solve the problem||States the problemclearly and identifies underlying issues.||1 2 3 4|
|Developing an approach to solve the problem||Fails to identify an approach to solve the problem||Identifies an inappropriate approach to solve the problem.||Identifies an appropriate approach to solve the Problem.||Identifies the best or most appropriate approach for solving the problem.||1 2 3 4|
|Applying appropriate procedures throughout the solution process||Fails to apply appropriate procedures and/or strategies throughout the solution.||Applies procedures and/or strategies to solve the problem with major errors or unnecessary steps throughout the solution.||Applies procedures and/or strategies to solve the problem with minor errors or unnecessary steps throughout the solution.||Applies appropriate and efficient procedures and/or strategies throughout the solution.||1 2 3 4|
|Solving the Problem||Fails to provide correct solution to the problem.||Provides a partially correct solution.||Provides a workable, and correct solution.||Provides an elegant, efficient, workable, complete, and correct solution.||1 2 3 4|
The recommended layout of your Case Study is suggested to be as follows
- Cover page
- Table of contents
- Recommendations and policy implications