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.

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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.

Assume all cash flows occur at the end of each period.

a. What is the net present value (discounted at 8%) of this project? Consider all costs and expected revenues. (Enter your answer in thousands of dollars. Perform all calculations using Excel. Do not round any intermediate calculations. Round your answer to the nearest thousand.)

b. What is the impact on NPV for the Kiddy Dozer if the actual sales are 50,000 per year? 70,000 per year? (Enter your answer in thousands of dollars. Perform all calculations using Excel. Do not round any intermediate calculations. Round your answer to the nearest thousand.)

c. Based on the original sales level of 60,000, what is the effect on NPV caused by changing the discount rate to 9%, 10%, or 11%? (Enter your answer in thousands of dollars. Perform all calculations using Excel. Do not round any intermediate calculations. Round your answer to the nearest thousand.)

Development cost $ 1,550,000 Estimated development time 9 months Pilot testing $ 200,000 Ramp-up cost $ 400,000 Marketing and support cost $ 150,000 per year Sales and production volume 60,000 per year Unit production cost $ 100 Unit price $ 235 Interest rate 8

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YEAR 2 PROJECT SCHEDULE KIDDY DOZER Development Pilot Testing Ramp-up Marketing and Support Production and Sales YEAR 1 YEAR 3 YEAR 4 91 3 34 91 92 9 & O1 02 % 9 Q 03 03 94

Explanation / Answer

a.

b. NPV Using Sales sales of 50000 per year

NPV using sales as 70000

Conclusion : As seen from above, NPV Decreased when units decreased to 50000 but increased when units increased to 70000.

c.

NPV using 8%,9%,10% and 11% as discount rate

Conclusion : As we can see from above table, as interest rate increased, the NPV kept on decreasing.

Staement showing NPV Calculation Particulars Amount($) Time (In years from date) Discount rate @ 8% (1/1.08^ Time) PV (Amount * Discount Rate) Development Cost -1550000 0.75 0.943913469 -1463065.878 Pilot Testing -200000 1 0.925925926 -185185.1852 Ramp up cost -400000 1 0.925925926 -370370.3704 Marking and Supporting Cost (Year 1) -37500 1 0.925925926 -34722.22222 Marking and Supporting Cost (Year 2) -150000 2 0.85733882 -128600.823 Marking and Supporting Cost (Year 3) -150000 3 0.793832241 -119074.8362 Marking and Supporting Cost (Year 4) -150000 4 0.735029853 -110254.4779 Contributon Year 2 (235-100)*60000 8100000 2 0.85733882 6944444.444 Contributon Year 3 (235-100)*60000 8100000 3 0.793832241 6430041.152 Contributon Year 4 (235-100)*60000 8100000 4 0.735029853 5953741.808 Net Present Value 16916953.61 NPV Rounded off to neared Thou 16917

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