Corporate Finance

Topics: Net present value, Decision theory, Price Pages: 3 (862 words) Published: August 25, 2013
Conch Republic Electronics Case Study Analysis

Conch Republic Electronics Case Study Analysis
Introduction
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 Their current PDA is quickly becoming outdated and they need to make a decision to design a new PDA with new features to continue their sales volume.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...

References: Berk, J., & DeMarzo, P. (2011). Corporate finance: the core. (2nd ed.). Boston, MA: Pearson Education.
Appendix A
Table 1
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