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	$	800,000
Estimated development time		9	months
Pilot testing	$	200,000
Ramp-up cost	$	400,000
Marketing and support cost	$	150,000	per year
Sales and production volume		60,000	per year
Unit production cost	$	100
Unit price	$	160
Interest rate		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.

YEAR 2 PROJECT SCHEDULE YEAR 1 YEAR 3 YEAR 4 KIDDY DOZER 91 3 34 91 92 9 & O1 02 % 9 Q 03 03 94 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.)

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.)

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 11%? (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

Solution:

Model

2 Sales/yr 60 Pilo mp-up and Support Marketing Production and Support and Sales Production Quarter Period Development Period cash flow Discount factors Present values Testing Schedule Cost 4 Year 1 Q1 0 1200/3 --1200/3 Q2 0 Q3 0 --200/2 400/2 -1200/3 200/2 400/2 150/4 7 8 Year 2 02 1 9 --150/4-200*SC$2/4--100"$CS24 -sUM(E10:J10) =1/(1+5K$20)'D10-K10*L 10 SUM E11 11) 11+SK$20 D K*L11 -sUM(E12:J12) =1/(1+5K$20)'D12=K12"L12 SUM E13 J13) 11+SKS20y D13K13 L13 -sUM(E14714) =1 (1+SK$20) 'D14=K14"L14 10 -1504200 SC$2/4100* SCS2/4 12 Year 3 --150/4-200*SC$2/4--100"$CS24 Q2 2 Q3 2 Q4 2 -1504200 SC$2/4100 SCS2/4 --150/4-200"SC$24--100"SCS24 =-150/4 16 Year 4 Q2 3 Q3 3 Q4 3 1 504 -200*SC$2/4 =-100*SCS24 -SUM[E17:J17) -1/(1+5K$20yD17-17"L17 18 19 -150/4 -SUMM4:M19) Discount rate 0.08 NPV 20

(a)

NPV base case (in thousands on dollar) = $13,239

(b)

Change cell $C$2 in the model with 50 and 70

NPV50,000 = $10,661

NPV70,000 = $15,816

(c)

Change cell $K$20 in the model with 9%, 10%, and 11%. Keep cell $C$2=60

NPV9% = $12,971

NPV10% = $12,711

NPV11% = $12,458