Investment Decisions Case
By: Fonta • Essay • 775 Words • November 16, 2009 • 3,005 Views
Essay title: 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