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	$	1,150,000
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	$	195
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 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

                           

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. 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. Round your answer to the nearest thousand.)

NPV50,000	$
NPV70,000	$

c.	What is the effect on NPV caused by changing the discount rate to 9%, 10%, or 11%? (Enter your answer in thousands of dollars. Round your answer to the nearest thousand.)

NPV9%	$
NPV10%	$
NPV11%	$

Answers:

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. Round your answer to the nearest thousand.)

Net present value

$ 12,093 ± .1%

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. Round your answer to the nearest thousand.)

NPV50,000	$ 9,726 ± .1%
NPV70,000	$ 14,460 ± .1%

c.	What is the effect on NPV caused by changing the discount rate to 9%, 10%, or 11%? (Enter your answer in thousands of dollars. Round your answer to the nearest thousand.)

NPV9%	$ 11,790 ± .1%
NPV10%	$ 11,495 ± .1%
NPV11%	$ 11,209 ± .1%

Answer 1

Answer 1 Year Discount factor @8% Production no of units per year Per unit sale price Per unit cost Contribution Fixed Cost Net contribution Present value of Cash inflows 0.925925926 150,000 (150,000) (138,889) 0.85733882 60,000 195 100 5,700,000 150,000 5,550,000 4,758,230 0.793832241 60,000 195 100 5,700,000 150,000 5,550,000 4,405,769 0.735029853 60,000 195 100 5,700,000 150,000 5,550,000 4,079,416 PV of cash inflows 13,104,526 Testing and ramp up cost at end of year 1(600000*discount rate 1 end of year Less : 555,556 Development cost at during year 1 (1150000*discount rate at end of year1) Less : 1,064,815 11,484,156 Net present value Net present value (in thousands) 11,484

Answer 2 ]f Actual sales is 50000 195 Year Discount factor @8% Production no of units per year Per unit sale price Per unit cost Contribution Fixed Cost Net contribution Present value of Cash inflows 0.925925926 150,000 (150,000) (138,889) 0.85733882 50,000 195 100 4,750,000 | 150,000 4,600,000 3,943,759 0.793832241 50,000 100 4,750,000 150,000 4,600,000 3,651,628 0.735029853 50,000 195 100 4,750,000 150,000 4,600,000 3,381,137 PV of cash inflows 10,837,635 Testing and ramp up cost at end of year 1/600000*discount rate 1 end of year Less : 555,556 Development cost at during year 1 (1150000*discount rate at end of yearl) Less : 1,064,815 9,217,265 Net present value Net present value (in thousands) 9,217

Answer 2 |f Actual sales is 70000 Year Discount factor @8% Production no of units per year Per unit sale price Per unit cost Contribution Fixed Cost Net contribution Present value of Cash inflows 0.925925926 150,000 (150,000) (138,889) 0.85733882 70,000 195 100 6,650,000 150,000 6,500,000 5,572,702 0.793832241 70,000 195 100 6,650,000 150,000 6,500,000 5,159,910 0.735029853 70,000 195 100 6,650,000 150,000 6,500,000 4,777,694 PV of cash inflows 15,371,417 Testing and ramp up cost at end of year 1(600000*discount rate 1 end of year Less : 555,556 Development cost at during year 1 (1150000* discount rate at end of year1) Less : 1,064,815 13,751,047 Net present value Net present value (in thousands) 13,751

_H Answer 3 if discount rate is 9% Year Discount factor @8% Production no of units per year Per unit sale price Per unit cost Contribution Fixed Cost 0.917431193 150,000 0.841679993 60,000 195 100 5,700,000 150,000 0.77218348 60,000 195 100 5,700,000 5 700 000 150,000 0.708425211 60,000 195 100 5,700,000 150,000 Net contribution Present value of Cash inflows (150,000) (137,615) 5,550,000 4,671,324 5,550,000 4,285,618 5,550,000 3,931,760 PV of cash inflows 12,751,088 Testing and ramp up cost at end of year 1(600000*discount rate 1 end of year 550,459 Less: Development cost at during year 1 (1150000*discount rate at end of year1) Less: 1,055,046 11,145,583 Net present value Net present value (in thousands) 11,146

Answer 3 if discount rate is 10% Year Discount factor @10% Production no of units per year Per unit sale price Per unit cost Contribution 0.909090909 0.826446281 60,000 195 100 5,700,000 0.751314801 60,000 195 100 5,700,000 0.683013455 60,000 195 100 5,700,000 3 Fixed Cost Net contribution Present value of Cash inflows 150,000 (150,000) (136,364) 150,000 5,550,000 4,586,777 150,000 5,550,000 4,169,797 150,000 5,550,000 3,790,725 PV of cash inflows 12,410,935 Testing and ramp up cost at end of year 1(600000* discount rate 1 end of year Less : 545,455 Development cost at during year 1 (1150000*discount rate at end of year1) Less: 1,045,455 10,820,026 Net present value Net present value (in thousands) 10,820

Answer 3 if discount rate is 11% Year Discount factor @11% Production no of units per year Per unit sale price Per unit cost Contribution 1 0 .900900901 2 0 .811622433 60,000 195 100 5,700,000 3 0 .731191381 60,000 195 100 5,700,000 4 0 .658730974 60,000 195 100 5,700,000 Fixed Cost Net contribution Present value of Cash inflows 150,000 (150,000) (135,135) 150,000 5,550,000 4,504,505 150,000 5,550,000 4,058,112 150,000 5,550,000 3,655,957 PV of cash inflows 12,083,438 Testing and ramp up cost at end of year 1(600000*discount rate 1 end of year Less : 540,541 Development cost at during year 1 (1150000*discount rate at end of Less : yeari) 1,036,036 10,506,862 Net present value Net present value (in thousands) 10,507