2. In 2012, the Gizmo Manufacturing Company launched a new gizmo at a retail pri

Question

2. In 2012, the Gizmo Manufacturing Company launched a new gizmo at a retail price of $50. The cost of manufacturing the gizmo was $15. During 2012, 100,000 gizmos were sold. During years each of the years 2013, 2014, 2015, 2016, and 2017, the number of units sold was 15% greater than the previous year. Also, over that same time period, the actual cost of producing a gizmo in a given year was 5% greater than the cost of producing it the previous year. The selling price for a gizmo in a given year was 10% less than the selling price the previous year. Over the 5-year period [2013, 2017, annual inflation was 2%. Gizmo Mfg has a real required return on investment of 8%. Defining 2012 as the present, what is the present worth of Gizmo's profits over the 5-year period? (15 pts)

Explanation / Answer

Computation of Gizmos profits over 5-year period -

Please note all values are in $.

In case of further calrification required please comment.

Year 2013 2014 2015 2016 2017 Present worth Selling price per unit 45 40.5 36.45 32.805 29.5245 Sold units per year 115000 132250 152087.5 174900.6 201135.7 Cost of manufacturing per unit 15.75 16.5375 17.36438 18.23259 19.14422 EBIT 3363750 3169041 2902685 2548723 2087844 less Tax 0 0 0 0 0 Cash flow after tax 3363750 3169041 2902685 2548723 2087844 Discount deflated factor @2% 0.980392 0.961169 0.942322 0.923845 0.905731 Real cash flows (CFAT*Deflated factor) 3297794 3045983 2735265 2354626 1891025 PV factor @ 8% 0.925926 0.857339 0.793832 0.73503 0.680583 Total PV (Real cash flow * PV factor) 3053513 2611439 2171341 1730720 1287000 10854014.21

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