Question

Development cost	$	1,300,000
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	$	210
Interest rate		8	%

YEAR 1 02 03 YEAR 2 0 0 YEAR 3 0 0 YEAR 4 02 03 04 Q 04 0 0 0 04 Q 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

Compute the initial cost using the equation as shown below:

Initial cost = Development cost + Pilot testing + Ramp – up cost

                 = $1,300,000 + $200,000 + $400,000

                 = $1,900,000

Hence, initial cost is $1,900,000.

Compute the Cash inflows per year using the equation as shown below:

Cash inflows = ( Sales units * Sales Price) – ( Sales units * Unit production cost) – Marketing support cost per year

                     = ( 60,000 * $210) – ( 60,000 * 100) - $150,000

                     = $12,600,000 - $6,000,000 - $150,000

                     = $6,450,000

Hence, cash inflows per year are $6,450,000.

Compute the PVIFA at 8% and 3 years, using the equation as shown below:

PVIFA = {1 – (1 + Rate)^{-Number of periods}}/ Rate

                   = {1 – (1 + 0.08)^-3}/ 8%

            = 2.577096987247880

Hence, the PVIFA at 8% and 3 years is 2.577096987247880.

Compute the net present value using the equation as shown below:

Net present Value = Present value of cash inflows - cash outflow

                               = ($6,450,000 * 2.577096987247880) - $1,900,000

                              = $16,622,275.5677488 * $1,900,000

                              = $14,722,275.5677488

Hence, net present value is $14,722,275.5677488.