Question

Problem 3-10 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 $950,000 9 months $200,000 $400,000 $150,000 per year 60,000 per year $ 100 $ 175 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. 9 YEAR 1 ₂ 0 9 9 YEAR 2 2 9 4 9 YEAR 3 O O O O YEAR 4 O O Q4 PROJECT SCHEDULE KIDDY DOZER Development Pilot Testing Ramp-up Marketing and Support Production and Sales 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.)

Answer 1

Development Cost	$9,50,000
Estimated Development Time	9	months
Pilot Testing	$2,00,000
Ramp-up Cost	$4,00,000
Marketing and support cost	$1,50,000	per year
Sales and Production volume	60000	per year
Unit Production cost	$100
Unit Price	$175
Interest Rate	8%	2%	Quarterly
Period (n)	1	2	3	4	5	6	7	8	9	10	11	12	13	14	15	16
Project Schedule	Year 1				Year 2				Year 3				Year 4
Kiddey Dozer	Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	TOTAL
Development	-$3,16,666.67	-$3,16,666.67	-$3,16,666.67	0	0	0	0	0	0	0	0	0	0	0	0	0
Pilot Testing	0	0	0	-$2,00,000	0	0	0	0	0	0	0	0	0	0	0	0
Ramp-up	0	0	0	-$4,00,000	0	0	0	0	0	0	0	0	0	0	0	0
Marketing and support	0	0	0	0	-$37,500	-$37,500	-$37,500	-$37,500	-$37,500	-$37,500	-$37,500	-$37,500	-$37,500	-$37,500	-$37,500	-$37,500
Production	0	0	0	0	-$15,00,000	-$15,00,000	-$15,00,000	-$15,00,000	-$15,00,000	-$15,00,000	-$15,00,000	-$15,00,000	-$15,00,000	-$15,00,000	-$15,00,000	-$15,00,000
Sales					$26,25,000	$26,25,000	$26,25,000	$26,25,000	$26,25,000	$26,25,000	$26,25,000	$26,25,000	$26,25,000	$26,25,000	$26,25,000	$26,25,000
Net Cashflow	-$3,16,666.67	-$3,16,666.67	-$3,16,666.67	-$6,00,000.00	$10,87,500.00	$10,87,500.00	$10,87,500.00	$10,87,500.00	$10,87,500.00	$10,87,500.00	$10,87,500.00	$10,87,500.00	$10,87,500.00	$10,87,500.00	$10,87,500.00	$10,87,500.00
PV Factor @ 8% i.e 2% Quarterly (1/1.02^n)	0.9804	0.9612	0.9423	0.9238	0.9057	0.8880	0.8706	0.8535	0.8368	0.8203	0.8043	0.7885	0.7730	0.7579	0.7430	0.7284
NPV	-$3,10,457.52	-$3,04,370.11	-$2,98,402.07	-$5,54,307.26	$9,84,982.26	$9,65,668.88	$9,46,734.19	$9,28,170.78	$9,09,971.35	$8,92,128.78	$8,74,636.06	$8,57,486.33	$8,40,672.87	$8,24,189.09	$8,08,028.52	$7,92,184.82	$91,57,317

b.	Sales	NPV
	50000	$73,25,446
	70000	$1,09,89,188
C.
	Interest Rate	NPV
	9%	$89,03,875
	10%	$86,58,191
	11%	$84,19,996

answers for b and c can be obtained by changing cell value of Sales and production volume (B6) and Interest Rate (B9) respectively.