Investment Decisions Case

Investment Decisions Case

Mini-case: Conch Republic Electronics

a. Payback period of the project

Years Prototype Market

Study Equipments Variable Fixed Total cost Sales

price Sales

Volume Total sales

1 750,000 200,000 15,000,000 6,020,000 3,000,000 24,970,000 250 70,000 17,500,000

2 6,880,000 3,000,000 9,880,000 250 80,000 20,000,000

3 8,600,000 3,000,000 11,600,000 250 100,000 25,000,000

4 7,310,000 3,000,000 10,310,000 250 85,000 21,250,000

5 6,450,000 3,000,000 9,450,000 250 75,000 18,750,000

66,210,000 102,500,000

Payback Period = Costs of project / Annual Cash Inflows

PP = 3.23

It will take 3.23 years to recover its initial costs.

b.

Profitability index is the following

Initial investment is 750,000 + 200,000 + 15,000,000 + 6,020,000 + 3,000,000 = 24,970,000

Estimated life 5 years

Annual cash inflows = 20,500,000

Required rate of return = 12%

PV = $20,500,000 x PV of an annuity of $1 for 5 years and 12% = 3.6048 = $20,500,000 x 3.6048

PV= 73,898,400

Profitability index = PV / I = 73,898,400 / 20,500,000 = 2.96

This project generates $2.96 for each dollar invested, therefore, it should be accepted.

Notes

Year Unit Sales Total Sales Var. Cost NWC Cash Flow

0

1 70,000 17,500,000 6,020,000 3,500,000 3,500,000

2 80,000 20,000,000 6,880,000 4,000,000 -500,000

3 100,000 25,000,000 8,600,000 5,000,000 -1,000,000

4 85,000 21,250,000 7,310,000 4,250,000 750,000

5 75,000 18,750,000 6,450,000 3,750,000 500,000

Development = 750,000

Marketing = 200,000

Initial investment = 950,000

Required Return (12%)

Tax 35%

0 1 2 3 4 5

Unit Price 250 250 250 250 250

Unit Sales 70,000 80,000 100,000 85,000 75,000

Revenue 17,500,000 20,000,000 25,000,000 21,250,000 18,750,000

Variable Costs 6,020,000 6,880,000 8,600,000 7,310,000 6,450,000

Fixed Costs 3,000,000 3,000,000 3,000,000 3,000,000 3,000,000

Depreciation (MACRS) 15,000,000 2,143,500 3,673,500 2,623,500 1,873,500 1,339,500

EBIT 6,336,500 6,446,500 10,776,500 9,066,500 7,960,500

Taxes (35%) 2,217,775 2,256,275 3,771,775 3,173,275 2,786,175

Net Income 4,118,725 4,190,225 7,004,725 5,893,225 5,174,325

4.

NPV= -950,000 +6,352,000

/10.25 +6,352,000

/105.06 +6,352,000

/1076.89 +6,352,000

/11,038.13 +6,352,000

/113,140.82

NPV = -950,000 +603,802.28 +60,460.69 +5898.47 +575.46 +56.14

NPV = -950,000 +670,793.04

NPV = -279,206.96

NPV = NO

3. IRR =

NPV = 0 = - 950,000 + 6,352,000 / (1 + R)

950,000 = 6,352,000 / (1 + R)

1 + R = 6,352,000 / 950,000