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 $900,000 $200,000 $150,000 per year 4001000 onthe $400,000 60,000 per year 100 170 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 YEAR 2 YEAR 3 PROJECT SCHEDULE KIDDY DOZER Development Pilot Testing Ramp-up Marketing and Support Production and Sales YEAR YEAR 4 Qu 04 Q Assume all cash flows occur at the end of each period

Answer 1

a)

Interest rate	8.00%
No of Unit	60000
Per Unit revenue	70
	Year 1				Year 2				Year 3				Year 4
	Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4
	1	2	3	4	5	6	7	8	9	10	11	12	13	14	15	16
Development	300000	300000	300000
Pilot Testing			100000	100000
Ramp Up			200000	200000
Marketing & Support				37500	37500	37500	37500	37500	37500	37500	37500	37500	37500	37500	37500	37500
Production & Sales					4200000	4200000	4200000	4200000	4200000	4200000	4200000	4200000	4200000	4200000	4200000	4200000
Total	-300000	-300000	-600000	-337500	4162500	4162500	4162500	4162500	4162500	4162500	4162500	4162500	4162500	4162500	4162500	4162500
PV	-294,118	-288,351	-565,393	-311,798	3,770,104	3,696,181	3,623,707	3,552,654	3,482,994	3,414,700	3,347,745	3,282,103	3,217,748	3,154,655	3,092,799	3,032,156
NPV	39,207,885

b)

Interest rate	8.00%
No of Unit	50000
Per Unit revenue	70
	Year 1				Year 2				Year 3				Year 4
	Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4
	1	2	3	4	5	6	7	8	9	10	11	12	13	14	15	16
Development	300000	300000	300000
Pilot Testing			100000	100000
Ramp Up			200000	200000
Marketing & Support				37500	37500	37500	37500	37500	37500	37500	37500	37500	37500	37500	37500	37500
Production & Sales					3500000	3500000	3500000	3500000	3500000	3500000	3500000	3500000	3500000	3500000	3500000	3500000
Total	-300000	-300000	-600000	-337500	3462500	3462500	3462500	3462500	3462500	3462500	3462500	3462500	3462500	3462500	3462500	3462500
PV	-294,118	-288,351	-565,393	-311,798	3,136,093	3,074,601	3,014,315	2,955,210	2,897,265	2,840,456	2,784,761	2,730,158	2,676,625	2,624,142	2,572,689	2,522,244
NPV	32,368,898

Interest rate	8.00%
No of Unit	70000
Per Unit revenue	70
	Year 1				Year 2				Year 3				Year 4
	Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4
	1	2	3	4	5	6	7	8	9	10	11	12	13	14	15	16
Development	300000	300000	300000
Pilot Testing			100000	100000
Ramp Up			200000	200000
Marketing & Support				37500	37500	37500	37500	37500	37500	37500	37500	37500	37500	37500	37500	37500
Production & Sales					4900000	4900000	4900000	4900000	4900000	4900000	4900000	4900000	4900000	4900000	4900000	4900000
Total	-300000	-300000	-600000	-337500	4862500	4862500	4862500	4862500	4862500	4862500	4862500	4862500	4862500	4862500	4862500	4862500
PV	-294,118	-288,351	-565,393	-311,798	4,404,116	4,317,761	4,233,099	4,150,097	4,068,722	3,988,944	3,910,729	3,834,048	3,758,871	3,685,167	3,612,909	3,542,068
NPV	46,046,871

c)

NPV at 9%	38,209,490
NPV at 10%	37,241,086
NPV at 11%	36,301,644