Hit or Miss Sports is introducing a new product this year. If its see-at-night s

Question

Hit or Miss Sports is introducing a new product this year. If its see-at-night soccer balls are a hit, the firm expects to be able to sell 58,000 units a year at a price of $70 each. If the new product is a bust, only 38,000 units can be sold at a price of $65. The variable cost of each ball is $40, and fixed costs are zero. The cost of the manufacturing equipment is $6.9 million, and the project life is estimated at 10 years. The firm will use straight-line depreciation over the 10-year life of the project. The firm’s tax rate is 35%, and the discount rate is 12%.

    

If each outcome is equally likely, what is expected NPV? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer in dollars not in millions. Round your answer to the nearest dollar amount.)

   

   

Will the firm accept the project?

   

Suppose now that the firm can abandon the project and sell off the manufacturing equipment for $6.21 million if demand for the balls turns out to be weak. The firm will make the decision to continue or abandon after the first year of sales. What is expected NPV? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer in dollars not in millions. Round your answer to the nearest dollar amount.)

   

   

Does the option to abandon change the firm’s decision to accept the project?

Hit or Miss Sports is introducing a new product this year. If its see-at-night soccer balls are a hit, the firm expects to be able to sell 58,000 units a year at a price of $70 each. If the new product is a bust, only 38,000 units can be sold at a price of $65. The variable cost of each ball is $40, and fixed costs are zero. The cost of the manufacturing equipment is $6.9 million, and the project life is estimated at 10 years. The firm will use straight-line depreciation over the 10-year life of the project. The firm’s tax rate is 35%, and the discount rate is 12%.

Explanation / Answer

A-1

A- 2 Yes the firm should take the project, since the NPV is positive.

B-1

B-2

Yes the project shoul still be undertaken as NPV is positive

If 58,000 units are produced and sold @ $70 Years 0 1 2 3 4 5 6 7 8 9 10 Revenue (6,900,000)    4,060,000    4,060,000    4,060,000    4,060,000    4,060,000    4,060,000    4,060,000    4,060,000    4,060,000    4,060,000 Cost (2,320,000) (2,320,000) (2,320,000) (2,320,000) (2,320,000) (2,320,000) (2,320,000) (2,320,000) (2,320,000) (2,320,000) Depreciation     (690,000)     (690,000)     (690,000)     (690,000)     (690,000)     (690,000)     (690,000)     (690,000)     (690,000)     (690,000) PBT    1,050,000    1,050,000    1,050,000    1,050,000    1,050,000    1,050,000    1,050,000    1,050,000    1,050,000    1,050,000 Tax @ 35%     (367,500)     (367,500)     (367,500)     (367,500)     (367,500)     (367,500)     (367,500)     (367,500)     (367,500)     (367,500) PAT    1,417,500    1,417,500    1,417,500    1,417,500    1,417,500    1,417,500    1,417,500    1,417,500    1,417,500    1,417,500 FCF=(PAT+depreciation)    1,417,500    2,107,500    2,107,500    2,107,500    2,107,500    2,107,500    2,107,500    2,107,500    2,107,500    2,107,500 Discount factor @ 12% 1.000 0.893 0.797 0.712 0.636 0.567 0.507 0.452 0.404 0.361 0.322 PV (6,900,000)    1,265,625    1,680,086    1,500,077    1,339,354    1,195,852    1,067,725       953,326       851,184       759,986       678,559 NPV    4,391,774 If 38,000 units are produced and sold @ 65 Years 0 1 2 3 4 5 6 7 8 9 10 Revenue (6,900,000)    2,470,000    2,470,000    2,470,000    2,470,000    2,470,000    2,470,000    2,470,000    2,470,000    2,470,000    2,470,000 Cost (1,520,000) (1,520,000) (1,520,000) (1,520,000) (1,520,000) (1,520,000) (1,520,000) (1,520,000) (1,520,000) (1,520,000) Depreciation     (690,000)     (690,000)     (690,000)     (690,000)     (690,000)     (690,000)     (690,000)     (690,000)     (690,000)     (690,000) PBT       260,000       260,000       260,000       260,000       260,000       260,000       260,000       260,000       260,000       260,000 Tax @ 35%       (91,000)       (91,000)       (91,000)       (91,000)       (91,000)       (91,000)       (91,000)       (91,000)       (91,000)       (91,000) PAT       351,000       351,000       351,000       351,000       351,000       351,000       351,000       351,000       351,000       351,000 FCF=(PAT+depreciation)    1,041,000    1,041,000    1,041,000    1,041,000    1,041,000    1,041,000    1,041,000    1,041,000    1,041,000    1,041,000 Discount factor @ 12% 1.000 0.893 0.797 0.712 0.636 0.567 0.507 0.452 0.404 0.361 0.322 PV (6,900,000)       929,464       829,879       740,963       661,574       590,691       527,403       470,896       420,442       375,395       335,174 NPV (1,018,118) Likely NPV >>>>>    1,686,828

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