Question

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.)

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	%

Answer 1

Compute the net present value (NPV), using MS-excel as shown below:

D 0.1 B E Net Present Value Particulars Discount Rate 0.08 0.09 6 Sales 60000 60000 60000 7 Units price 210 210 210 8 Unit cost 100 100 9 Contribution =(C7-C8)*C6 =(D7-D8)*D6 =(E7-E8)*E6 10 Development cost -1300000 -1300000 -1300000 11 Pilot testing -200000 -200000 -200000 12 Ramp-up cost -400000 -400000 - 400000 13 Marketing and support cost |-150000 -150000 -150000 0.11 60000 210 100 =(F7-F8)*F6 -1300000 -200000 -400000 -150000 14 15 Annual cash flows 16 Discount rate 17 18 NPV =SUM(C9:C13) =SUM(D9:D13) =SUM(E9:E13) =SUM(F9:F13) 0.08 0.09 0.1 0.11 =C15/C16 =D15/D16 =E15/E16 =F15/F16

The result of the above excel table is as follows:

B 4 Particulars 6 Sales 7 Units price 8 Unit cost 9 Contribution 10 Development cost Pilot testing 12 Ramp-up cost 13 Marketing and support cost D E F Net Present Value Discount Rate 8% 9% 10% 11% 60000 60000 60000 60000 $ 210 $ 210 $ 210 $ 210 $ 100 $ 100 $ 100 $ 100 $ 6,600,000 $ 6,600,000 $ 6,600,000 $ 6,600,000 ($ 1,300,000) ($ 1,300,000) ($ 1,300,000) ($ 1,300,000) ($ 200,000) ($ 200,000) ($ 200,000) ($ 200,000) ($ 400,000) ($ 400,000) ($ 400,000) ($ 400,000) ($ 150,000) ($ 150,000) ($ 150,000) ($ 150,000) 11 14 15 Annual cash flows 16 Discount rate $ 4,550,000 8% $ 4,550,000 9% $4,550,000 10% $ 4,550,000 11% 17 18 NPV $ 56,875,000 $ 50,555,556 $ 45,500,000 $ 41,363,636 |

Hence, the NPV at 8%, 9%, 10% and 11% is $56,875, $50,555, $45,500 and $41,364 respectively.