Conch Republic Electronics Case Study Solution
Cash flow is calculated to find the viability of the project. Initial investments of a prototype, marketing cost, and additional Equipment are $75000, $20000 and $21.5 million respectively. Variable cost is $155 per unit, fixed cost is 4.7 million per year.Revenues is calculated by adding variable cost, fixed cost and multiplying with sales unit cost. Depreciation is calculated by the MACRS method and its 7-year rate.
The payback period for the company to recover its investment has been calculated in the excel file.
Payback Period = Years before Full Recovery + Unrecovered Amount at the beg/Cash flow of the year)
The calculations for the Payback Period (PP) are given in the attached excel sheet. It could be seen from Exhibit 1 that the PP of the project equals 2.82 years, which implies that the investment amount i.e. $22450000 of the project, despite negative cash flow in the first year; will be recovered within the 3 years approximately, indicating to a strong viability of the project.
Profitability Index shows the ratio between the discounted cash flows of the project, with its initial investment to show by how many times the cash flows are greater than the investment amount.
Sum of PV of Cash Flows/Initial Investment
From Exhibit 1, it could be seen that the New PDA Project has a profitability index of 2.37 which implies that the project has a worth of 2.37 time of its initial investment that is quite significant.
Internal Rate of Return (IRR)
IRR is the ratewhere the present value of inflows is equal to the present value of outflows. The internal rate of return must be greater than the required rate of return.
PV of Inflows = PV of Outflows
From Exhibit 1, IRR of this project is 42% with a require rate of return of 12%,showing a significant positive difference in the rate.
Net Present Value (NPV)
The net present value of the project depends upon IRR. NPV shows that the company should invest in the project or not. It is helpful for the firms to check the profitability of the project..................................................
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