The Tuff Wheels was getting ready to start its development project for a new pro

Question

The Tuff Wheels was getting ready to start its development project for a new product to be added to their small motorized vehicle line for children. The new product is called the Kiddy Dozer. It will look like a miniature bulldozer, complete with caterpillar tracks and a blade. Tuff Wheels has forecasted the demand and the cost to develop and produce the new Kiddy Dozer. The table below contains the relevant information for this project. Development cost Estimated development time Pilot testing Ramp-up cost Marketing and support cost Sales and production volume Unit production cost Unit price Interest rate $ 850,ooo months $200,oo0 $400,000 $150,0oo per year 60,000per year $100 $165 8 Tuff Wheels also has provided the project plan shown below. As can be seen in the project plan, the company thinks that the product life will be three years until a new product must be created.

Explanation / Answer

Solution:

(Whole solution in $ terms only.)

Step1 : Intial Investment

Development cost = 901000 (850000 + 850000 * 9/12 * 8%)

Pilot Testing = 208000 (200000 + 200000 * 6/12 * 8%)

Ramp up Cost = 416000 (400000 + 400000 * 6/12 * 8%)

Marketing Cost = 37500 (150000 * 3/12)

Total Initial Investment = 1562500

Step 2 : Annual Cashflow

NPV (Qty-60000, 8%) = -1562500 +9664125

NPV = 8101625

NPV is positive hence project should be accepted.

NPV (Qty-50000, 8%) = -1562500 +7989010

NPV = 6426510

NPV (Qty-70000, 8%) = -1562500 +11339240

NPV = 9776740

NPV (Qty-50000, 9%) = -1562500 +9492375

NPV = 7929875

NPV (Qty-50000, 10%) = -1562500 +9325500

NPV = 7763000

NPV (Qty-50000, 11%) = -1562500 +9163875

NPV = 7601375

In this question i am not providing answer point wise rather than on wholistic basis.

Particulars Condition 1(QTY -60000) Condition 1(QTY - 50000) Condition 1(QTY - 70000) Sales @ 165 9900000 8250000 11550000 Less :Production Cost @100 6000000 5000000 7000000 Contribution 3900000 3250000 4550000 less: Marketing Cost 150000 150000 150000 Profit 3750000 3100000 4400000 PVAF@8 % 2.5771 2.5771 2.5771 Annual Cashflow 9664125 7989010 11339240 PVAF@9 % 2.5313 Annual Cashflow 9492375 PVAF@10 % 2.4868 Annual Cashflow 9325500 PVAF@11 % 2.4437 Annual Cashflow 9163875

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