2. The goal of this review is to analyze the expected sales figures for
the proposed new smart phone by Conch Republic Electronics
Sales of the existing smart phone have been very successful
Conch
Republic
Electronics
Smart Phone
Project Review
The new smart phone model is a response to new market trends
and technology advances
Conch Republic anticipates terminating production of the existing
smart phone model in two years
This analysis will review the below figures and their bearing on the
success of the new smart phone’s introduction to market
Payback Period
3.147
Profitability Index
1.475
IRR
25.44%
NPV (Net Present Value)
$18,304,125.01
3. Conch
Republic
Electronics
Smart Phone
Project Review –
Payback Period
The payback period for the new smart phone investment is 3.147
years; this is the time period in which the company will recover the
cost of the initial investment in the new smart phone project
The company has not designated a set cutoff for the payback
period
The calculated payback period is greater than the anticipated
termination date for sales of the old smart phone; but less than the
five-year projection for sales of the new smart phone
The new smart phone will generate increased sales throughout the
five-year period, so a 3-year payback period is acceptable for this
investment
4. Conch
Republic
Electronics
Smart Phone
Project Review –
Profitability Index
The profitability index (PI) of this project is 1.475
The PI is the present value of future cash flows divided by the
initial investment
Logically, we want the former value to be higher than the latter; so
the PI should always be positive in order to consider the project a
good investment
Here, the PI is 1.475, a positive number, indicating that the smart
phone project is indeed a good investment
5. Conch
Republic
Electronics
Smart Phone
Project Review –
IRR (Internal Rate
of Return)
The IRR, or Internal Rate of Return, of the project is 25.44%
The IRR is a method of determining the strength of an investment
using a single rate of return; the rate is “internal” because it is
based on the cash flows of a particular investment and does not
consider rates offered externally
We can evaluate the merit of this figure by comparing it to the
required return
The required return on this project is 12%
The IRR of 25.44% far exceeds the required return, which tells us
the smart phone project is a strong investment
6. Conch
Republic
Electronics
Smart Phone
Project Review –
NPV (Net Present
Value)
The Net Present Value (NPV) of the project is approximately $18.3
million
NPV is equal to the difference between the market value and the
cost of a particular investment
Again, logically we desire the former number to be greater than
the latter
In this case, the NPV of $18.3 million indicates a good investment
in the production of the new smart phone
8. Conch
Republic
Electronics
Sensitivity to
changes in Price
In order to gauge the risk associated with changes in the price of
the new smartphone, we have performed a sensitivity analysis
To simulate a reduction in the price of the phone due to market
competition, we have changed the price of the phone to $450 and
recalculated the NPV
The NPV at a price per unit of $450 is now approximately $11.8
million, a reduction of approximately $6.5 million or 36%
9. Conch
Republic
Electronics
Sensitivity to
changes in
Quantity
We now reduce the quantity of units produce by 25,000 and
recalculate the NPV
The new NPV is approximately $34.8 million, an increase of $16.5
million
The change in price is sensitive to change in a negative way and
should be considered a higher risk than changes in units