Smart Phones by Conch Republic - Case Study Example

Currently the company has its smart phone model in the market which has already earned company a good chunk of revenues. However, with the passage of time, Conch Republic keeps on investing more money in its research and development activities so that its major products continue to exist in the market without getting obsolete. As a result, the company has developed a new model of the existing smart phone which has different new features but the most popular one is that of Wi-Fi tethering. The company has planned to terminate the production of the existing smart phones in next two years, but have made the financial viability of the introduction of new smart phones.

The proposed smart phones are estimated to have the useful life of around five years. The company has already incurred around $750,000 and $200,000 on the development of the prototype and the marketing campaign of the new smart phones respectively. However, both of these costs are not included in the investment appraisal computation of the new smart phones because they are assumed to be the sunk cost. Sunk costs are those which do not matter whether a certain project is either accepted or rejected, in this way, these two costs would have no impact upon the decision to accept or reject the new smart phone. . Therefore, in the computation of net cash flows, the impact of loss of contribution in the existing smart phone model due to introduction of new smart phones, are also included and they are considered as a cash outflows.

Assumptions All the amounts included in the computation are US Dollars ($). Taxes are assumed to be paid to the authorities in the year in which the tax liability of Conch Republic arises. Impact of inflation is ignored. Discount factor for Conch Republic is estimated to be 12%. Depreciation rates are assumed to 5-years MACRS. Conch Republic is assumed to pay tax at the rate of 35%. Investment Appraisal The project of introduction of new smart phones by Conch Republic has been mainly appraised with the help of traditional investment appraisal techniques which are Discounted Payback Period, Profitability Index, Internal Rate of Return and lastly but the most famous one, Net Present Value.

The most important factor which is common in all the above mentioned techniques is the use of discounted cash flows so that the impact of time value of money can managed appropriately (Brigham et al, 2008). The main stream presentation of the computation of the overall investment appraisal of the new smart phones is attached at the end of this discussion along with workings of changes in working capital and loss of contribution of the existing smart phones due to launch of new smart phones. 1.

Discounted Payback Period (PBP) Discounted Payback Period mainly depicts the duration in which the initial investment of any project is likely to be recovered (Eckbo, 2008). For the proposed new smart phones, the discounted payback period is found to be 3.94 years which means that in around 3.94 years, there is likelihood that the initial investment of $38.5 million is