2. Your company wants to launch a new product. R&D; (including prototypes and ma

Question

2. Your company wants to launch a new product. R&D; (including prototypes and manufacturing process development will take 1 year and cost $60.000. You will need a special measuring machine, which you will lease at $10.000 per quarter: no other new equipment will be required. Fixed costs (rent, insurance, etc) for the area of the factory where the R&D; will be done and the units will be produced is $5000 per quarter. The cost of goods sold (including all materials, power, labor, etc) will be $2000 for each unit. Marketing estimates that they can sell 10 units in the first quarter after launch, ramping up to 15 in second and 20 in future quarters at a price of $8000 each. Stating any assumptions you make: I) When will the project break even? ii) Draw a cash flow diagram for 3 years from the start of R&D.; iii) Compute the present worth of the project.

Explanation / Answer

Particulars/Quarters 0 1 2 3 4 5 6 7 8 9 10 11 12 Initial Investment(A) -60000 Lease of measuring machine(B) 10000 10000 10000 10000 10000 10000 10000 10000 10000 10000 10000 10000 Fixed Cost

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