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 $1,400,000 9 months $ 200,000 $ 400,000 $ 150,000 per year 60,000 per year 100 220 Interest rate 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 1 YEAR 3 PROJECT SCHEDULE KIDDY DoZER YEAR 2 YEAR4 Development Pilot Testing Ramp-up Marketing and Support 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.) Net present value 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.) NPV 50,000 NPV 70,000 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 11967 (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.) NPV 996 NPV 10% NPV 11%

Answer 1

NPV THOUSANDS OF DOLLARS

		YEAR 1				YEAR 2				YEAR 3				YEAR 4
		Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4
	DEVELOPMENT COST [1400/3QUARTER]	-466.67	-466.67	-466.67
	PILOT TESTING			-200	-200
	RAMP UP COST			-400	-400
	MARKETING AND SUPPORT COST [150000/4QTR] =37500 PER QUARTER				-37.5	-37.5	-37.5	-37.5	-37.5	-37.5	-37.5	-37.5	-37.5	-37.5	-37.5	-37.5	-37.5
	PRODUCTION VOLUME UNIT [60000/4QTR]					15000	15000	15000	15000	15000	15000	15000	15000	15000	15000	15000	15000
	UNIT PRODUCTION COST					100	100	100	100	100	100	100	100	100	100	100	100
	TOTAL PRODUCTION COST IN 000 DOLLARS					-1500	-1500	-1500	-1500	-1500	-1500	-1500	-1500	-1500	-1500	-1500	-1500
	SALES UNIT					15000	15000	15000	15000	15000	15000	15000	15000	15000	15000	15000	15000
	PRICE PER UNIT					220	220	220	220	220	220	220	220	220	220	220	220
	REVENUE[SALES UNIT *PRICE PER UNIT] IN 000 DOLLARS					3300	3300	3300	3300	3300	3300	3300	3300	3300	3300	3300	3300
	CASH FLOWS	-466.67	-466.67	-1066.67	-637.5	1762.5	1762.5	1762.5	1762.5	1762.5	1762.5	1762.5	1762.5	1762.5	1762.5	1762.5	1762.5
	DISCOUNT FACTOR AT 8% [1/1.08]N	1	1	1	1	0.9259	0.9259	0.9259	0.9259	0.85733	0.85733	0.85733	0.85733	0.7938	0.7938	0.7938	0.7938
	PRESENT VALUE OF CASH FLOWS	-466.67	-466.67	-1066.67	-637.5	1631.89	1631.89	1631.89	1631.89	1510.61	1510.61	1510.61	1510.61	1399.07	1399.07	1399.07	1399.07
	NPV	15529$
		[-2637.51+6527.56+6042.44+5596.28]