You work for Toyota. After the recent problems with car recalls, you have been a

Question

You work for Toyota. After the recent problems with car recalls, you have been assigned the task of developing a new exciting product line. Your idea is the Toyota Toy-boat-a: an amphibious 4x4 that can be used across jungle, desert, swamp, and river equally. You have completed most of the product research and now need to set the sales price. Specifically, you need to estimate the minimum price at which the Toy-boat-a should be sold for so that the product line has a positive NPV. You have estimated the following:

• You expect the car to sell 10,000 units each year for ten years. After this there are no more sales.

• Each car will cost $22,500 to produce (excluding depreciation)

• There will be initial capital expenditure of $1,250 million today, which is depreciated straight line over ten years to zero. The investment in capital expenditure will be worthless at the end of ten years. • The product line will not require any net working capital.

• The tax rate is 35%

• The discount rate is 8%.

What is the minimum sale price for the Toy-boat-a so that the product line has a positive NPV?
HINT: First, calculate the Operating Cash Flow required, and then calculate the price. Report your answer to the nearest cent.

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Explanation / Answer

Details Amount Initial Cost 12500,00,000.00 Annual Operating cash Expense=22500*10000     2250,00,000.00 Less Tax shield on above       787,50,000.00 Net Cash outflow     1462,50,000.00 PVAF @ 8%                          6.71 Discounted cash outflow     9813,49,404.60 Less Depreciation Tax Shield=1250000000/10*.35       437,50,000.00 PVAF @ 8%                          6.71 Discounted cash inflow from tax savings     2935,66,061.20 Net operating cash outflow    ( 2935,66,061.20*6.71)     6877,83,343.39 Net cash outflow of the project 19377,83,343.39 Sales after tax required to make NPV=0 19377,83,343.39 Annual after tax Sales required=1937783343/6.71     2887,86,860.00 Annual Before tax Sales Required=288786860/.65           4442,87,477 Sales Price Per Unit=444287477/10000                44,428.75

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