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unit sales level. The fixed costs of launching the DC6900-X have been forecast to be $2 million during the first year of commercialization. Should Mr. Leonard add the DC6900-X model to the line of personal computers? Why?

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Bunny Greenfelder
Bunny GreenfelderLv2
13 Jan 2019

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Suppose a U.S. computer company has a wholly-owned British subsidiary, Albion Computers PLC, which manufactures and sells personal computers in the U.K. market. Albion Computers imports microprocessors from Intel, which sells them for $512 per unit. At the current exchange rate of $1.60 per pound, each Intel microprocessor costs £320. Albion Computers hires British workers and sources all the other inputs locally. Albion faces a 50 percent income tax rate in the U.K. The exhibit below summarizes projected operations for Albion Computers, assuming that the exchange rate will remain unchanged at $1.60 per pound. The company expects to sell 50,000 units of personal computers per year at a selling price of £1,000 per unit. The unit variable cost is £650, which comprises £320 for the imported input and £330 for the locally sourced inputs. Needless to say, the pound price of the imported input will change as the exchange rate changes, which, in turn, can affect the selling price in the U.K. market. Each year, Albion incurs fixed overhead costs of £4 million for rents, property taxes, and the like, regardless of output level. As the exhibit shows, the projected operating cash flow is £7,250,000 per year, which is equivalent to $11,600,000 at the current exchange rate of $1.60.

Benchmark Sales (50,000 units at £1,000/unit) £50,000,000

Variable costs (50,000 units at £650/unit) 32,500,000

Fixed overhead costs 4,000,000

Depreciation allowances 1,000,000

Net profit before tax £12,500,000

Income tax (50%) 6,250,000

Profit after tax 6,250,000

Add back depreciation 1,000,000

Operating cash flow in pounds £7,250,000

Operating cash flow in dollars $11,600,000

1. Now consider the possible effect of an appreciation of the pound on the projected dollar operating cash flow of Albion Computers. Assume that the pound may appreciate from $1.60 to $1.90 per pound.

(a) Suppose Albion decides to maintain its selling price of its personal computers in the U.S. market at US$1,600 per unit. Compute the projected cash flow in pounds as well as in dollars following the pound appreciation.

(b) Assuming that the pound appreciation would affect CFs for 4 years, and assuming a discount rate of 15%, calculate the PV of the CFs over 4 years. Using the benchmark case for comparison, calculate Albion’s Gain/Loss in operating CFs from the change in the pound.

2. Consider Case 3 of Albion Computers PLC discussed in the chapter. Now, assume that the pound is expected to depreciate to $1.50 from the current level of $1.60 per pound. This implies that the pound cost of the imported part, i.e., Intel’s microprocessors, is £341 (=$512/$1.50).Other variables, such as the unit sales volume and the U.K. inflation rate of 8 percent, remain the same as in Case 3. Also, because of facing an elastic demand for its products, sales volume declines to 40,000 units per year after the price increase.

(a) Compute the projected annual cash flow in pounds as well as in dollars.

(b) Assuming that the pound depreciation would affect CFs for 4 years, and assuming a discount rate of 15%, compute the PV of the CFs over 4 years. Using the benchmark case for comparison, calculate Albion’s projected operating gains/losses over the four-year horizon due to the pound depreciation.

Conch Republic Electronics is a midsized electronics manufacturer located in Key West, Florida. The company president is Shelley Couts, who inherited the company. Over the years, the company expanded into manufacturing and is now a reputable manufacturer of various electronic items. One of the major revenue-producing items manufactured by Conch Republic is a Smartphone. Conch Republic currently has Smartphone model on the market and sales have been excellent. The smartphone is a unique item in that it comes in a variety of tropical colors ad is preprogrammed to play Jimmy Buffett music. However as with any electronic item, technology changes rapidly, and the current smartphone has limited features in comparison with newer models. Conch republic spent $750,000 to develop a prototype for a new smartphone that has all the features of the existing one, but adds new features such as WIFI capability. The company has spent a further $200,000 for a marketing study to determine the expected sales figures for the new smartphone. Conch republic can manufacture the new smartphone 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 smartphone will be $480. The necessary equipment can be purchased for $38.5 million and will be depreciated on a seven-year MACRS schedule. It is believed the value of the equipment in five years will be $5.4 million.

As previously stated, Conch Republic currently manufactiures a smart phone. Production of the existing model is expected to be terminated in two years. If Conch Republic does not introduce the new smartphone, 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 cost of $125 each and fixed cost of $1,800,000 per year. If Conch Republic does introduce the new smart phone, sales of the existing smart phones will fall by 15,000 units per year and the price of the existing units will have to be lowered to $275

Net working capital for the smartphone will be 20% of sales and will occur with the timing of the cash flows for the year (i.e., there is no initial outlay for NWC). Changes in NWC will thus first occur in Year 1 with the first year%u2019s sales. Conch Republic has a 35% corporate tax rate and a 12% required return. Shelly has asked Jay to prepare a report that answers the following question:

1. What is the payback period of the project?

2. What is the profitability index of the project?

3. What is the IRR of the project?

4. What is the NPV of the project


CONCH REPUBLIC ELECTRONICS

CONCH REPUBLIC ELECTRONICS IS A MID SIZED 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 PERSONAL DIGITAL ASSISTANT (PDA). CONCH REPUBLIC CURRENTLY HAS ONE PDA MODEL ON THE MARKET, AND SALES HAVE BEEN EXCELLENT. THE PDA 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 PDA HAS LIMITED FEATURES IN COMPARISON WITH NEWER MODELS. CONCH REPUBLIC DEVELOPED A PROTOTYPE FOR A NEW PDA THAT HAS ALL THE FEATURES OF THE EXISTING PDA BUT ADDS NEW FEATURES SUCH AS CELL PHONE CAPABILITY. THE COMPANY HAS PERFORMED A MARKETING STUDY TO DETERMINE THE EXPECTED SALES FIGURES FOR THE NEW PDA. CONCH REPUBLIC CAN MANUFACTURE THE NEW PDA FOR $200 EACH IN VARIABLE COSTS. FIXED COSTS FOR THE OPERATION ARE ESTIMATED TO RUN $4.5 MILLION PER YEAR. THE ESTIMATED SALES VOLUME IS 70,000, 80,000, 100,000, 85,000, AND 75,000 PER EACH YEAR FOR THE NEXT FIVE YEARS, RESPECTIVELY. THE UNIT PRICE OF THE NEW PDA WILL BE $340. THE NECESSARY EQUIPMENT CAN BE PURCHASED FOR $16.5 MILLION AND WILL BE DEPRECIATED ON A 5 YEAR STRAIGHT-LINE SCHEDULE. NET WORKING CAPITAL INVESTMENT FOR THE PDAS WILL BE $6,000,000 THE FIRST YEAR OF OPERATIONS. OF COURSE NWC WILL BE RECOVERED AT THE PROJECTS END. CONCH REPUBLIC HAS A 35 PERCENT CORPORATE TAX RATE AND A 12 PERCENT REQUIRED RETURN. SHELLY HAS ASKED JAY TO PREPARE A REPORT THAT ANSWERS THE FOLLOWING

QUESTIONS:

1) WHAT IS THE IRR OF THE PROJECT?

2) WHAT IS THE NPV OF THE PROJECT, BASED ON THE REQUIRED RATE OF RETURN OF 12%?

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