Conch Republic is a mid-sized electronics manufacturer who has become a reputable PDA manufacturer and it is their major revenue producing item. Their current PDA is quickly becoming outdated and they need to make a decision to design a new PDA with new features to continue their sales volume. This case analysis will evaluate whether or not Conch Republic Electronics should develop a new PDA. Payback period, profitability index, IRR, NPV, and a sensitivity analysis will be calculated to figure out if this is a good investment opportunity for the company or if they should reject the project. Analysis
1. What is the payback period of the project? The payback period is approximately 3 years for the new PDA design. �The payback investment rule, states that you should only accept a project if its cash flows pay back its initial investment within a specific period� (Berk, & DeMarzo, 2011, p. 164). Firms usually use the payback rule first because it is easiest and fastest to calculate but they usually also calculate the IRR and NPV before making a decision to accept or reject a project (Berk, & DeMarzo, 2011). 2. What is the profitability index of the project? The profitability index for the new PDA is .557 which is the value created in terms of NPV per unit of resource consumed (Berk, & DeMarzo, 2011). �Practitioners often use the profitability index to identify the optimal combination of projects to undertake in such situations� (Berk, & DeMarzo, 2011, p. 172). It is especially helpful if a firm is trying to decide which project to take on out of several different projects, it helps to find the most profitable. 3. What is the IRR of the project? The IRR of the new PDA is 28.31% and since the cost of capital is 12% this investment would be recommended to undertake. As Berk & DeMarzo, 2011, describe applying the IRR rule �Take any investment opportunity where the IRR exceeds the opportunity cost of capital� (p.160). Just like the payback and the NPV rules, IRR is usually applied to stand alone projects such as the new PDA design that Conch Republic is considering. 4. What is the NPV of the project? The NPV
of the new PDA is $18,096,793.00 and since this is a positive number the NPV rules states to accept the project. �Although the NPV rule is the most accurate and reliable decision rule, in practice a wide variety of tools are applied often in tandem with the NPV rule� (Berk, & DeMarzo, 2011, p. 158). These other tools for example are the IRR, profitability index, figuring the payback period and conducting a sensitivity analysis. 5. How sensitive is the NPV to changes in the price of the new PDA? As illustrated in appendix A table 1, the NPV is sensitive to changes in the price of the new PDA. �Sensitivity analysis breaks the NPV calculation into its component assumptions and shows how the NPV varies as the underlying assumptions change� (Berk, & DeMarzo, 2011, p. 201). The sensitivity analysis performed was to show the difference in price with an increase and decrease in price by 10%. 6. How sensitive is the NPV to changes in the quantity sold? The sensitivity analysis performed was to show the difference in quantity sold with an increase and decrease by 10%. The increase raised the NPV to $12,959,415 and the decrease lowered the NPV to $2,323,417. 7. Should Conch Republic produce the new PDA? Yes, Conch Republic should produce the new PDA since the IRR is larger than the cost of capital and the NPV is positive. The profitability isn�t a big factor since this is a stand-alone project. The sensitivity analysis also supports the decision to accept the project. 8. Suppose Conch Republic loses sales on other models because of the introduction of the new model. How would this affect your analysis? This is to be expected, the new model will cost more and Conch Republic should want customers to purchase the newer more expensive model instead of the older model. They should slow down on production of the older model and plan only producing it for warranty replacements or to have a few on hand as the less expensive alternative. This would not affect my analysis since as a company they should plan on selling the new model more than the older model to produce more revenue. Conclusion
In conclusion this analysis evaluated the investment opportunity for Conch Republic Electronics for designing a new PDA. This analysis was evaluated using payback period, profitability index, IRR, NPV, and a sensitivity analysis. Any electronics company is going to have to upgrade their devices to stay relevant and to get customers to want to buy their
products. If Conch Republic couldn�t afford to upgrade their PDA, this would be a bad sign for their company overall since it is imperative for a company to be innovative to be sustainable.