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Answers Corporate Finance

In: English and Literature

Submitted By carolsnake
Words 2058
Pages 9
CHAPTER 10
CONCH REPUBLIC ELECTRONICS, PART 1

This is an in-depth capital budgeting problem. The initial cash outlay at Time 0 is simply the cost of the new equipment, $21,500,000. The sales each year are a combination of the sales of the new PDA, the lost sales each year, and the lost revenue. In this case, the lost sales are 15,000 units of the old PDA each year for two years at a price of $290 each. The company will also be forced to reduce the price of the old PDA on the units they will still sell for the next two years. So, the total change in sales is:

Sales = New sales – Lost sales – Lost revenue

Year 1 = (74,000 × $360) – (15,000 × $290) – [(80,000 – 15,000) × ($290 – 255)] = $20,015,000 Year 2 = (95,000 × $360) – (15,000 × $290) – [(60,000 – 15,000) × ($290 – 255)] = $28,275,000

| |Sales |Year 1 |Year 2 |Year 3 |Year 4 |Year 5 |
| |New |$26,640,000 |$34,200,000 |$45,000,000 |$37,800,000 |$28,800,000 |
| |Lost sales |–4,350,000 |–4,350,000 | | | |
| |Lost revenue |–2,275,000 |–1,575,000 | | | |
| |Net sales |$20,015,000 |$28,275,000 |$45,000,000 |$37,800,000 |$28,800,000 |
| | | | | | | |
| |VC | | | | | |
| |New

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