Your company wants to launch a new product. R&D; (including prototypes and manuf

Question

Your company wants to launch a new product. R&D; (including prototypes and manufacturing process development will take 1 year and cost $60,000. You will need a special measuring machine, which you will lease at $10,000 per quarter; no other new equipment will be required. Fixed costs (rent, insurance, etc) for the area of the factory where the R&D; will be done and the units will be produced is $5000 per quarter. The cost of goods sold (including all materials, power, labor, etc) will be $2000 for each unit. Marketing estimates that they can sell 10 units in the first quarter after launch, ramping up to 15 in second and 20 in future quarters at a price of $8000 each. Stating any assumptions you make: i) When will the project break even? ii) Draw a cash flow diagram for 3 years from the start of R&D.; iii) Compute the present worth of the project. Show all work for rating!!

Explanation / Answer

Break Even

n quarters

60000+ 10000*n +5000*n = 2000*10 +2000*15 +8000 *20 (n-2)

n= 2.34 quarters.

Cash flow

1st Quarter ----> -60000

-10000

-5000

+20000

2nd Quarter------->

-10000

-5000

+30000

3rd and 4th quarter------------->

-10000

-5000

+160000

For calculation of Present worth we need the rate of interest which is not given in the question

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