portfolio valuation

Finance Portfolio Valuation Instructions • Case studies should be submitted in Word format (.docx or .doc). Also, detailed cash flows charts/tables must be submitted. • For all practical/problem questions, complete and detailed workings/calculations must be shown (attach the excel spreadsheets with appropriate references). Please note that answers without evidence of workings (in appendices or excel spreadsheets) will not be given any merit and will attract zero marks. • In addition to the content, presentation will be taken into account in determining your final grade of the assignment. • Length: Maximum 5 pages (excluding appendices or excel spreadsheets). Portfolio Valuation Conch Electronics is a mid-sized electronics manufacturer located in Tasmania. The company president is Shelley Couts, who inherited the company. When it was founded over 70 years ago, the company originally repaired radios and other household appliances. Over the years, the company expanded into manufacturing and is now a reputable manufacturer of various electronic items. Jay McCanless, a recent graduate, has been hired by the company’s finance department. One of the major revenue- producing items manufactured by Conch Electronics is a personal digital assistant (PDA). Conch Republic currently has one PDA model on the market, and sales have been excellent. The PDA is a unique item in that it comes in a variety of tropical colours and is pre-programmed to play reggae music. However, as with any electronic item, technology changes rapidly, and the current PDA has limited features in comparison with newer models. Conch Electronics spent $750000 to develop a prototype for a new PDA that has all the features of the existing PDA but adds new features such as mobile phone capability. The company has spent a further $200000 for a marketing study to determine the expected sales figures for the new PDA. Conch Electronics can manufacture the new PDA for $155 each in variable costs. Fixed costs for the operation are estimated to run $4.7 million per year. The estimated sales volume is 74000, 95000, 125000, 105000, and 80000 per each year for the next five years, respectively. The unit price of the new PDA will be $360. The necessary equipment can be purchased for $21.5 million and will be depreciated over seven years at prime cost. It is believed the value of the equipment in five years will be $4.1 million. As previously stated, Conch Electronics currently manufactures a PDA. Production of the existing model is expected to be terminated in two years. If Conch Electronics does not introduce the new PDA, sales will be 80000 units and 60000 units for the next two years, respectively. The price of the existing PDA is $290 per unit, with variable costs of $120 each and fixed costs of $1800000 per year. If Conch Electronics does introduce the new PDA, sales of the existing PDA will fall by 15000 units per year, and the price of the existing units will have to be lowered to $255 each. Net working capital for the PDAs will be 20 percent of sales and will occur with the timing of the cash flows for the year; for example, there is no initial outlay for NWC, but changes in NWC will first occur in year 1 with the first year’s sales. Conch Electronics has a 30 percent corporate tax rate and a 12 percent required return. Questions Shelley has asked Jay to prepare a report that answers the following questions. 1 What is the payback period of the project? 2 What is the profitability index of the project? 3 What is the IRR of the project? 4 What is the NPV of the project? 5 Based on the calculation above, what action should Conch Electronics take?