Project

FIN 5213 Financial Management

Coral Bay Electronics

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.

Table 1: MACRS

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?

Instructions for Coral Bay Electronics Case

1. Read the case carefully: The case content contains all the information needed to complete

this Excel spreadsheet. You don’t need to submit another document to answer the questions

stated in the case. These questions serve as guidelines to help you work on the spreadsheet.

2. Download and rename the Excel file: Download the Excel file attached in the folder and

rename it to "Coral Bay Electronics_YOUR NAME."

3. Open and complete the yellow Cells: In the Excel file, complete the cells marked in yellow.

a. Start with the input area, then proceed to the output area. Ensure you have the correct

numbers in the input area, as incorrect numbers will affect the accuracy of estimations in

the output area.

b. Identify the values for equipment spending, salvage value, R&D, and marketing study costs

in cells D4-D7. Provide an assessment and explanation on whether to include development

spending and marketing study costs in the relevant cash flow estimation in cells E6 and E7.

c. Fill in cells D10-H13 for new tracker sales, depreciation rate, sales of old trackers, and lost

sales of old trackers.

d. Obtain the values for the price of new trackers, variable costs of the new tracker, and other

variables in the input table. Be accurate when entering numbers for "price of old tracker,"

"price reduction of old tracker," and "variable cost of old tracker."

4. Begin working on the output area:

a. Ensure you use variables from the input area in formulas to calculate output area values.

For example, to calculate new tracker sales in cell D30, use the formula =D15*D10 rather

than typing numbers directly. Manually entering numbers in the output area is not

acceptable !

b. Start with sales estimation: Use new tracker sales and the price of new trackers from the

input area to complete cells D30-H30 for new tracker sales.

c. Estimate Side Effects: Estimate "Lost sales due to new tracker," which calculates sales loss

due to decreased sales units of old trackers times old trackers’ original price, and "Lost

revenue due to new tracker," which estimates revenue loss due to price reduction for old

trackers sold in years 1 and 2. Net sales of new trackers are calculated as new tracker sales

minus these negative side effects.

d. Complete variable cost estimation: Adjust variable cost (VC) savings on old trackers,

considering the drop in old tracker sales in years 1 and 2.

e. Calculate operating cash flow for Years 1 to 5: Use prior calculations for net sales and net

variable costs. Apply the MACRS table to calculate annual depreciation.

5. Prepare net working capital (NWC) estimation:

a. Cells C51-H51 represent the total NWC investment required each year. Cells C52-H52

show the amount of NWC invested or recovered each year. Negative numbers in row 52

indicate NWC investment (cash outflows), and positive numbers indicate NWC recovery

(cash inflows). Pay special attention to NWC recovery in year 5. Refer to class notes (p.

11-30) for details.

6. After-tax salvage value estimation (only in Year 5): Calculate the after-tax salvage value.

Pay attention to the capital gains or losses when selling the equipment. The after-tax salvage

value in H58 corresponds to the net terminal cash flow (class notes, p. 11-31).

7. Calculate net cash flow (Net CF): Combine all relevant cash flows above to calculate Net

Cash Flow in row 61 and determine cumulative Net CF in row 62.

8. Calculate financial metrics: Compute the payback period, profitability index (PI), net present

value (NPV), internal rate of return (IRR), modified internal rate of return (MIRR), and NPV

based on the estimated net cash flows.

9. Provide conclusion and final assessment: Conclude with an assessment of the project below

row 71.