The Conch Republic Electronics

The Conch Republic Electronics mini-case is applying real-life simulation to the cash flow models for evaluation of capital decisions. 

What is the payback period of this project? 

The information provided is as follows: 

Initial Cost (Development of prototype): $750,000.00 

Amount for marketing study: $200,000.00 

Price for each new smart phone: $480.0 

Manufacture per unit cost: $185.0 

Fixed operational costs: $5,300,000 

Required equipment: $38,500,000 

Believed value of equipment (Project Life) 5 years 

Net working capital for the smart phones 20% 

Estimated sales volume for next 5 years: $74,000.00, $95,000.00, $125,000.00, $105,000.00, and $80,000.00 

Rate of tax 35% 

Rate of Return 12% 

Depreciation 7 MACRS 

Savage Value $5,400,000.00 

Sales = (New sales – lost sale – lost revenue) 

First year (74,000 x $480)-(15000 x$310) – [(80,000-15,000) x ($310-$275)] 

$35,520,000.00 – $4,650,000.00 - $2,275,000.00 = $28,595,000.00 

Second year (95,000 x 480) – (15,000 x $310) – [(60,000-15,000) x ($310-$275) 

$45,600,000.00 - $4,650,000.00 - $1,575,000.00 = $39,375,000.00 

Third year New Sales ($125,000 x $480) = $60,000,000.00 

Fourth year ($105,000 x $480) = $50,400,000.00 

Fifth year ($80,000 x $480) = $38,400,000.00 

Variable cost 1 year (Cost product – lost sales) 

($185 x $74,000) – ($125 x $15,000) 

$13,690,000.00 - $1,875,000.00 = $11,815,000.00 

2 year ($185 x $95,000) – ($125 x $15,000) 

$17,575,000.00 - $1,875,000.00 = $15,700,000.00 

3 year ($185 x $125,000) = $23,125,000.00 

4 year ($185 x $105,000) = $19,425,000.00 

5 year ($185 x $80,000) = $14,800,000.00 

Equipment depreciation 

Year one $38,500,000.00 x 14.29% = $5,501,650.00 

Year two $38,500,000.00 x 24.49% = $9,428,650.00 

Year three $38,500,000.00 x 17.49% = $6,733,650.00 

Year four $38,500,000.00 x 12.49% = $4,808,650.00 

Year five $38,500,000.00 x 8.93% = $3,438,050.00 

Operating cash flow 

(Sales – Variable cost – Fixed cost – Depreciation) x (1 – Tax Rate) + Depreciation 

Year 1 ($28,595,000 - $11,815,000 -$5,300,000 - $5,501,650) x (1 – 0.35) + $5,501,650 

($5,978,350) x (0.65) + $5,501,650 = $9,387,577.50 

Year 2 ($39,375,000- 15,700,000 -$5,300,000 - $9,428,650) x (1 – 0.35) + $9,428,650 

($8,946,350) x (0.65) + 9,428,650 = $15,243,777.50 

Year 3 ($60,000,000 - $23,125,000 -$5,300,000 - $6,733,650) x (1 – 0.35) + $6,733,650 

($24,841,350) x (0.65) + $6,733,650 = $22,880,572.50 

Year 4 ($50,400,000 - $19,425,000 -$5,300,000 - $4,808,650) x (1 – 0.35) + $4,808,650 

($20,866,350) x (0.65) + $4,808,650 = $18,371,777.50 

Year 5 ($38,400,000 - $14,800,000 -$5,300,000 - $3,438,050) x (1 – 0.35) + $3,438,050 

($14,861,950) x (0.65) + $3,438,050 = $13,098,317.50 

Net working capital at 20% of the total sales 

Year 1 -20% x $28,595,000.00 = $-5,719,000.00 

Year 2 $28,595,000.00 x 20% = $5,719,000.00 

$5,719,000.00 – (20% x $39,375,000.00) 

$5,719,000.00 - $7,875,000.00 = $-2,156,000.00 

Year 3 $39,375,000.00 x 20% = $7,875,000.00 

$7,875,000.00 – (20% x $60,000,000.00) 

$7,875,000.00 - $12,000,000.00 = $-4,125,000.00 

Year 3 $60,000,000.00 x 20% = $12,000,000.00 

$12,000,000.00 – (20% x $50,400,000.00) 

$12,000,000.00 - $1,080,000.00 = $1,920,000.00 

Year 5 $50,400,000.00 x 20% = $1,080,000.00 

$1,080,000.00 – (20% x $38,400.00) 

$1,080,000 - $7,680,000 = $2,400,000.00 

The operating Cash flow and Net working Capital 

Year one $9,387,577.50 - $5,719,000.00 = $3,688,577.50 

Second year $15,243,777.50 - $2,156,000.00 = $13,087,777.50 

Third year $22,880,572.50 - $4,125,000.00 = $18,755,527.50 

Fourth year $18,371,777.50 + $1,920,000.00 = $20,291,777.50 

Fifth year $13,098,317.50 +$2,400,000.00 = $15,498,317.50 

Calculating payback period 

Initial cost $38,500,000.00 

Cash flow first three years $3,688,577.50 + $13,087,777.50 + $18,755,527.50 = $35,511,932.50 

Payback period 3 + remaining cash flow 

Cash flow year 4 

3 + 38,500,000 – 35,511,932.50 

$20.291, 777.50 

3 + $2,988,067.50 = 3 + 0.1472550889 = 3.15 

$20.291, 777.50 

The payback period is 3.15 showing that Conch Republic Electronics should recover their initial cost in 3 years and two months. 

NPV = -$38,500,000.00 + 1,901,078 + 11,565,278 + 20,000,528 + 20,291,778 + 20,898,318 

1 + IRR (1+IRR) 2 (1+IRR) 3 (1+IRR) 4 (1+IRR) 5 

So the IRR is 20.8% 

NPV = -$38,500,000 + 1,901,078 + 11,565,278 + 20,000,528 + 20,291,778 + 20,898,318 

1 + .12 (1+.12) 2 (1+.12) 3 (1+.12) 4 (1+.12) 5 

= -$38,500,000 + $1,697,391.07 + $9,219,768.81 + $14,235,980.77 + $12,895,791.76 + $11,858,266.87= 14,407,199.28 

Profitability Index = NPV. 

Initial expenditure 

= 11,407,199 

38,500,000 

= 29.63% = Profitability index 

References 

Ross, Westerfield, & Jordan. (2013). Fundamentals of Corporate Finance (10 th ed.). New York, NY: McGraw-Hill Irwin.