The Tuff Wheels was geting ready to shart ts development project for a new produ
ID: 2615908 • Letter: T
Question
The Tuff Wheels was geting ready to shart ts development project for a new produdt to be adled to hei small motorized vehidle line for children. The new product is called the Kiddy Dozer illok ike miniature bulldozer,complete with caterpllar tacks and a blade. Tuf Wheels has forecasted the deman and the cost to develop and produce the new Kodby Dozer The able below contains the relevart nfomation for this project Development cost Estimated development time Plot testing Ramp-up cost Marketing and support cost $150,000 per year Sales and production volume 60000 peryear Unit production cos Unit price Interest rate 800,000 9month 200,000 $400,000 S 100 S 160 8% uf Wheels also has providet he prject plan sowm below As an e se in company thinks that the product ife wibe treeyears until anew product must be cea the project plan, Pot Testing Ramp-up Markleting and Support Production and Sale he net presert value (dsorted at 8%l dts pren consider-costs ard expeded Er in thousands of dollars. Perform all calculations using Excel D und your answer to the nearest thousandExplanation / Answer
Answer- a: Calculation of Net Present Value (Discount rate 8%)
Year 1
Year 2
Year 3
Year4
Development Cost
-800000
Plot Testing
-200000
Ramp- up cost
-400000
Marketing and Support Cost
-37500
-150000
-150000
-150000
Production Cost (Production Volume * Production Cost per unit)
-6000000
-6000000
-6000000
Annual Costs
-1437500
-6150000
-6150000
-6150000
Sales Revenue (Sales Volume * Unit Price)
9600000
9600000
9600000
Net Annual Cash Flows
-1437500
3450000
3450000
3450000
Present Value Factor @ 8%
1
0.92592
0.85733
0.79383
Present Value of Net Cash Flow
-1437500
3194424
2957788.5
2738713.5
Note: In year 1 marketing and support cost only for 1 quarter is included (150,000/4)
Net Present Value = Present Value of Net Cash Inflow – Present value of Net Cash Outflow
= (3,194,424 + 2,957,788.50 + 2,738,714.50) – 1,437,500
= $ 7,453,426.
Answer- b: Calculation of NPV if actual sales are 50,000 or 70,000 per year.
In such cash net cash flow for 1 year will remain same but that of year 2, 3, and 4 will change:
If Annual Sales are 50,000 units:
Year 1
Year 2
Year 3
Year4
Marketing and Support Cost
-150000
-150000
-150000
Production Cost (50,000 * Production Cost per unit)
-5000000
-5000000
-5000000
Annual Costs
-1437500
-5150000
-5150000
-5150000
Sales Revenue (50,000 * Unit Price)
8000000
8000000
8000000
Net Annual Cash Flows
-1437500
2850000
2850000
2850000
Present Value Factor @ 8%
1
0.92592
0.85733
0.79383
Present Value of Net Cash Flow
-1437500
2638872.00
2443390.50
2262415.50
NPV = $ 5,907,178
If Annual sales are 70,000 units
Year 1
Year 2
Year 3
Year4
Marketing and Support Cost
-150000
-150000
-150000
Production Cost (70,000 * Production Cost per unit)
-7000000
-7000000
-7000000
Annual Costs
-1437500
-7150000
-7150000
-7150000
Sales Revenue (70,000 * Unit Price)
11200000
11200000
11200000
Net Annual Cash Flows
-1437500
4050000
4050000
4050000
Present Value Factor @ 8%
1
0.92592
0.85733
0.79383
Present Value of Net Cash Flow
-1437500
3749976.00
3472186.50
3215011.50
NPV = $ 8,999,674
Answer- c:
NPV at different rates
Year 1
Year 2
Year 3
Year4
Net Annual Cash Flows
-1437500
3450000
3450000
3450000
Using Excel
NPV @ 9%
7295466.60
NPV @10%
7142139.37
NPV @ 11%
6993315.77
Year 1
Year 2
Year 3
Year4
Development Cost
-800000
Plot Testing
-200000
Ramp- up cost
-400000
Marketing and Support Cost
-37500
-150000
-150000
-150000
Production Cost (Production Volume * Production Cost per unit)
-6000000
-6000000
-6000000
Annual Costs
-1437500
-6150000
-6150000
-6150000
Sales Revenue (Sales Volume * Unit Price)
9600000
9600000
9600000
Net Annual Cash Flows
-1437500
3450000
3450000
3450000
Present Value Factor @ 8%
1
0.92592
0.85733
0.79383
Present Value of Net Cash Flow
-1437500
3194424
2957788.5
2738713.5
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