A consumer product company is considering introducing a new shaving system calle

Question

A consumer product company is considering introducing a new shaving system called DELTA-4 in the market. The company plans to manufacture 75 million units of DELTA-4 a year. The investment at time 0 that is required for building the manufacturing plant is estimated as $500 million, and the economic life of the project is assumed to be 10 years. The annual total operating expenses, including manufacturing costs and overheads, are estimated as $175 million. The salvage value that can be realized from the project is estimated as $120 million. At a MARR of 25%, what is the break-even sales price per unit?

Explanation / Answer

Let break-even sales price per unit = s

Free cashflow year 1-9 = 75*(s) -175 million

Free cashflow year 10 = 75s-175 +120 million

for breakeven, NPV =0

-500 + (75*(s) -175)/1.25 + (75*(s) -175)/1.25^2 + (75*(s) -175)/1.25^3 + (75*(s) -175)/1.25^4..... (75*(s) -175)/1.25^9 + (75s-175 +120)/1.25610 =0

75*(s) -175 = 136.428

break-even sales price per unit, s = $4.15

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