Question

You are evaluating the launch of a new product. The total market size is 2,000,000 units in Year 1. The total market is expected to grow 2% each rear thereafter For the new product, you are expected to have a market share of 6% when the product launches in Year 1, Market share will grow 10% each year thereafter. (Note: this is a 10% growth on the initial 6%, not 10% of the total market). The product will sell for $20.00 the first year, and then increase by $5 each year after. Per unit variable cost is $5.00 the first year with a 5% increase each year. Fixed Costs is$10,000 in the first year with a 3% increase each year. Calculate Revenue, Total Cost of Sales (COGS), and Profit. Calculate NPV over a 4-year period (year 1-4) assuming a 7% discount rate. Would you recommend this new product based on the NPV?

Answer 1

In this question, the initial cash outlay is not given. Hence, I cannot calculate the NPV. However, I have calculated the present value of the profits generated from the business in the Excel table given below:

Year	1	2	3	4
Total Market Share	2000000	2040000	2080800	2122416
New Product Market Share	120000	132000	145200	159720
Selling Price per product	20	25	30	35
Variable cost per product	5.00	5.25	5.51	5.79
Fixed Cost	10000	10300	10609	10927.27
Revenue	2400000	3300000	4356000	5590200
COGS	610000	703300	811024	935406.6
Profit	1790000	2596700	3544976	4654793
NPV	₹ 1,03,85,831.53

Revenue = Selling Price* Product Market Share

CoGS = Variable Cost*Product Market Share + Fixed Cost

Profit = Revenue - COGS

Formula used to calculate NPV = npv(0.07,Profits from Year 1 to Year 4), where 0.07 is the discount rate.