MySocks, Inc. is contemplating the formation of a project team to develop a new
ID: 350381 • Letter: M
Question
MySocks, Inc. is contemplating the formation of a project team to develop a new sock printing service. The service would allow customers to order customized socks over the Internet based on their own photographs. MySocks will initially need to invest $500,000 to purchase equipment to produce these special socks. The company estimates they can sell the socks for $17.50 per pair, and they plan to keep this selling price steady over a period of 6 years. The company expects they will be able to sell 30,000 pairs of socks in the first year, and then experience a 10% growth rate in sales annually over the next 5 years (6 years total in the calculation). The variable expense to produce each pair of socks will start at $3 per pair, with an expected inflation rate for variable expenses of 3% per year over the same 6-year period. The company uses an 11% discount rate to calculate NPV. The leaders of MySocks have asked their project manager to calculate a NPV to determine the financial value of pursuing this product development project for the company. What is the Net Present Value (NPV) for MySocks over the life of this 6-year period? Submit your financial/NPV analysis in an Excel spreadsheet with all your calculations and formulas visible.
Explanation / Answer
No. of Units = 30000 * (1 + r)n-1, where r = 10% and n = year
Variable Expense = 3 * (1 + r)n-1, where r = 3% and n = year
PV = Cashflow / (1 + r)n, where r = 11%, n = year
NPV = Sum of PVs
Year Selling Price No. of Units Total Sales Variable Expense Total Expenses Total Profit 1 17.50 30,000 525,000.00 3.00 90,000.00 435,000.00 2 17.50 33,000 577,500.00 3.09 101,970.00 475,530.00 3 17.50 36,300 635,250.00 3.18 115,532.01 519,717.99 4 17.50 39,930 698,775.00 3.28 130,897.77 567,877.23 5 17.50 43,923 768,652.50 3.38 148,307.17 620,345.33 6 17.50 48,315 845,517.75 3.48 168,032.02 677,485.73Related Questions
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