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CHAPTER 11
CONCH REPUBLIC ELECTRONICS,
PART 2
1. Here we want to examine the sensitivity of NPV to changes in the price of the new smart phone. The
calculations for sensitivity to changes in price are similar to the original cash flows. The only
The sales figure for the first two years will be the sales of the new smart phone, minus the lost sales
Sales = New sales – Lost sales – Lost revenue
Sales Year 1 Year 2 Year 3 Year 4 Year 5
New $82,150,000 $87,450,000 $66,250,000 $50,350,000 $39,750,000
VC
Sales $59,700,000 $70,100,000 $66,250,000 $50,350,000 $39,750,000
VC 28,975,000 31,125,000 26,875,000 20,425,000 16,125,000
CHAPTER 11 C-2
EBT $18,837,550 $22,956,550 $26,191,550 $18,766,550 $13,908,350
Tax 6,593,143 8,034,793 9,167,043 6,568,293 4,867,923
NWC
Taxes on sale of equipment = (BV – MV)TC = ($9,035,550 – 6,100,000)(.35) = $1,027,443
So, the cash flows of the project under this price assumption are:
Time Cash Flow
0 –$40,500,000
1 6,091,858
The NPV with this sales price is:
And the sensitivity of changes in the NPV to changes in the price is:
For every dollar change in price of the new smart phone, the NPV of the project changes
CHAPTER 11 C-3
2. Here we want to examine the sensitivity of NPV to changes in the quantity sold. The calculations for
sensitivity to changes in quantity are similar to the original cash flows. The only difference is that we
The sales figure for the first two years will be the sales of the new smart phone, minus the lost sales
of the existing smart phone, minus the lost dollar sales from the price reduction of the existing smart
phone, or:
Sales = New sales – Lost sales – Lost revenue
Note, the variable costs must also be increased to account for additional units sold.
Sales Year 1 Year 2 Year 3 Year 4 Year 5
New $80,652,000 $85,852,000 $65,052,000 $49,452,000 $39,052,000
Lost sales –11,400,000 –11,400,000
VC
Sales $58,202,000 $68,502,000 $65,052,000 $49,452,000 $39,052,000
VC 28,996,500 31,146,500 26,896,500 20,446,500 16,146,500
Fixed costs 6,100,000 6,100,000 6,100,000 6,100,000 6,100,000
NWC
CHAPTER 11 C-4
Taxes on sale of equipment = (BV – MV)TC = ($9,035,550 – 6,100,000)(.35) = $1,027,443
So, the cash flows of the project under this quantity assumption are:
Time Cash Flow
0 –$40,500,000
1 5,403,783
The NPV under this assumption is:
NPV = –$40,500,000 + $5,403,783 / 1.12 + $21,727,533 / 1.122 + $24,005,283 / 1.123 +
So, the sensitivity of NPV to units sold is:
For a one unit per year change in quantity sold of the new smart phone, the NPV of the project
changes $680.80 in the same direction.
