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

Soln : a) Step 1: Create a Time Value table with all expenses and evenues to be captured to understand the cash flows each year :

Now as we know the discounted rate = 8%, need to bring all cash flows value at one point of time , t = 0, discount factor, d=1 /(1+r)t So, we can say that PV = d* Cash flow and NPV is sum of all PVs

Please refer here table again for NPV

(b) In case if actual sales are 50000, please refer the table for NPV

And in case if it is 70000

c) Now, in case if sales is 60000 and discount rate is 9%:

Again in case if discount rate = 10%, :

And if rate is 11%:

Year 0 0.25 0.5 0.75 1 2 3 4 Development Cost 1550000 Pilot testing 200000 Ramp up cost 400000 Sales 60000 60000 60000 60000 UNIT price 235 235 235 235 Revenue 14100000 14100000 14100000 14100000 Marketing and support 150000 150000 150000 150000 Production cost 6000000 6000000 6000000 6000000 Cash Flows -1550000 7350000 7950000 7950000 7950000

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