Coral Bay Electronics is a midsized electronics manufacturer located in St. Louis,

Missouri. 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. Joe Hanks, a recent MBA

graduate, has been hired by the company’s finance department.

One of the major revenue-producing items manufactured by Coral Bay Electronics

is the fitness tracker. Coral Bay Electronics currently has a fitness tracker model on the

market, and sales have been excellent. However, as with any electronic item, technology

changes rapidly, and the current fitness tracker has limited features compared to newer

models from its competitors. Coral Bay Electronics spent $750,000 to develop a prototype

for a new generation fitness tracker that has all the features of the existing model but

adds new features such as an ECG monitor, GPS tracking, and heart rate monitoring.

The company has spent a further $250,000 on a marketing study to determine the

expected sales figures for the new fitness tracker.

Coral Bay Electronics can manufacture the new fitness tracker for $100 each in

variable costs. Fixed costs for the new operation are estimated to be $2.5 million annually.

The estimated sales volume is 75,000, 95,000, 100,000, 115,000, and 80,000 per year

for the next five years. The unit price of the new fitness tracker will be $220 for the first

three years, dropping to $175 in year 4 and year 5. The necessary equipment can be

purchased for $7.5 million and will be depreciated on a seven-year MACRS schedule

(see table below). It is believed the value of the equipment in five years will be $1.5 million.

As previously stated, Coral Bay Electronics currently manufactures fitness trackers.

Production of the existing model is expected to be terminated in two years. If Coral Bay

Electronics does not introduce the new fitness tracker, sales will be 60,000 and 50,000

units for the next two years, respectively. The price of the existing fitness tracker is $185

per unit, with variable costs of $ 90 each and fixed costs of $1,800,000 per year. If Coral

Bay Electronics does introduce the new fitness tracker, sales of the existing fitness tracker

are expected to fall by 25,000 units in year 1 and 35,000 in year 2, and the price of the

existing units is expected to be lowered to $120 for each unit. Net working capital (NWC)

FIN 5213 Financial Management

for the new fitness tracker is estimated to be 28% of next year’s sales. The total

investment in NWC is expected to be fully recovered when the project ends. Coral Bay

Electronics has a 20% corporate tax rate and a 15% required return.

Shelly has asked Joe to prepare a report using EXCEL to evaluate this new

project. Please use the following questions to guide you in working on the Excel

spreadsheet.

1. Will you include $750,000 in development spending and $250,000 in marketing

study costs in your project’s cash flow analysis? Why or why not? (answer in cell

D6&D7).

2. What are NET SALES and NET VARIABLE COSTS each year?

FIN 5213 Financial Management

3. What is the depreciation cost each year?
4. What is the operating cash flow each year?
5. What is the net working capital cash flow each year?
6. What is the cash flow on equipment sales in year 5 after adjusting taxes?
7. What are this project’s net cash flows (Net CF) each year, starting from year 0?
8. What is the payback period for the project?
9. What is the profitability index of the project?
10. What is the IRR of the project?
11. What is the MIRR of the project?
12. What is the NPV of the project?
13. What is your final recommendation to the CEO about this new project?