Hit or Miss Sports is introducing a new product this year. If its see-at-night s

Question

Hit or Miss Sports is introducing a new product this year. If its see-at-night soccer balls are a hit, the firm expects to be able to sell 53,000 units a year at a price of $40 each. If the new product is a bust, only 33,000 units can be sold at a price of $35. The variable cost of each ball is $10, and fixed costs are zero. The cost of the manufacturing equipment is $6.0 million, and the project life is estimated at 10 years. The firm will use straight-line depreciation over the 10-year life of the project. The firm’s tax rate is 30%, and the discount rate is 14%.

Hit or Miss Sports can expand production if the project is successful. By paying its workers overtime, it can increase production by 28,000 units; the variable cost of each ball will be higher, however, equal to $15 per unit. By how much does this option to expand production increase the NPV of the project? (Assume the probability the see-at-night soccer balls will be a hit is 50%). (Do not round intermediate calculations. Round your answer to the nearest dollar amount.)

Hit or Miss Sports is introducing a new product this year. If its see-at-night soccer balls are a hit, the firm expects to be able to sell 53,000 units a year at a price of $40 each. If the new product is a bust, only 33,000 units can be sold at a price of $35. The variable cost of each ball is $10, and fixed costs are zero. The cost of the manufacturing equipment is $6.0 million, and the project life is estimated at 10 years. The firm will use straight-line depreciation over the 10-year life of the project. The firm’s tax rate is 30%, and the discount rate is 14%.

Hit or Miss Sports can expand production if the project is successful. By paying its workers overtime, it can increase production by 28,000 units; the variable cost of each ball will be higher, however, equal to $15 per unit. By how much does this option to expand production increase the NPV of the project? (Assume the probability the see-at-night soccer balls will be a hit is 50%). (Do not round intermediate calculations. Round your answer to the nearest dollar amount.)

Explanation / Answer

if the product is hit NPV

inflow=2120000-530000-600000(1-0.30)=693000+600000=1293000

NPV=744437.53

if unit increases by 28000

Inflow=3240000-1215000-600000(1-0.3)=997500+600000=1597500

NPV=2332744.745

increase in NPV=1588307.21

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