Conch Republic Electronics Prob Ch9

Net cash flow from operation Sales in units Sales in $ less variable cost less fixed cost less depreciation Earnings before taxes less taxes Earnings after taxes add deprecation less/ working capital add equipment value net of taxes Net cash flows after taxes

1 2 68000 79000 18700000 21725000 6596000 7663000 3400000 3400000 2929450 5020450 5774550 5641550 2021092.5 1974542.5 3753457.5 3667007.5 6682907.5 8687457.5 3740000 605000

3 105000 28875000 10185000 3400000 3585450 11704550 4096592.5 7607957.5 11193407.5 1430000

2942907.5 80 8082457.5

9763407.5

Depreciation under MACRS 1 2 3 4 5 6 7 8

14.29 24.49 17.49 12.49 8.93 8.92 8.93 4.42

20500000 20500000 20500000 20500000 20500000 20500000 20500000 20 20500000

2929450 5020450 3585450 2560450 1830650 1828600 1830650 906100 20491800

Note: 1 we are assuming that the development cost cost is included in the fixed cost. 2 All working capital will be recouped in in the 5th year. 3 The book value of equipment is more than the market value at the end end of 5the ye on the loss has been adjusted to determine the cash flow from equipment at the en

1) Payback period

Net flow Cumulative 1 2942908 2942908 1 2 8082458 11025365 1 3 9763408 20788773 0.97 4 9499258 30288030 5 14276271 44564301 2.97 years or 3 years

2) Profitability index

Net flow D.F - .12 PV 1 2942908 0.89 2627595.98 2 8082458 0.8 6443285.63 3 9763408 0.71 6949400.61 4 9499258 0.64 6036949.87 5 14276271 0.57 8100739.28 30157971.38

PI -

1.47 3) 0 1 2 3 4 5

(20,500,000) 2942908 8082458 9763408 9499258 14276271

IRR

26.14% 4)

Present value of inflows less initial investment NPV positive

30157971.38 (20,500,000) 9,657,971

5) Sensitivity analysis by using break even point Contribution margin 275-97

Highest fixed cost Contribution margin required to make cover fixed cost add variable cost The selling price may be reduced to At this selling price break even is 204-97  The price may be reduced by 275-204 in %

178

8420450

106.59 97 203.59

107 78695.79 units 71 0.26

If the price decreases by around 25% company will be in no profit no loss situation 6) Break even at the current price  The difference in quantity 79000-47305 If qty is decrease by

47305.9

31695 0.4

If decrease in quantity is 40% the company will be in no profit no loss situation. 7) Keeping in view the NPV and IRR the company can go for this project. 8) Definitely the affect of decrease in sales should be taken as it will reduce the profita

4 5 83000 64000 22825000 17600000 8051000 6208000 3400000 3400000 2560450 1830650 8813550 6161350 3084742.5 2156472.5 5728807.5 4004877.5 8289257.5 5835527.5 -1210000 -4565000 3875743 9499257.5 ###

15926450 20500000 4573550

0

3500000 -1073550 -375742.5 3875743

ar hence the tax benefit of 5th year.

9474635

bility of the company as well.