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Investment Decisions case. Investment Decisions Case Mini-case: Conch Republic
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Submitted by tutran on June 5, 2007
Category: Business
Words: 775 | Pages: 4
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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...
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