Hit or Miss Sports is introducing a new product this year. If its see-at-night s
ID: 2654035 • Letter: H
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
Normal Production Expected Sales Option Hit Bust Var. Cost 10 Var. Cost 15 Expected sles units 53000 33000 43000 43000 Unit price 40 33 Sales 2120000 1089000 1604500 1604500 Variable Cost 630000 330000 430000 480000 Contribution 1490000 759000 1174500 1124500 Less:Depreciation (6000000/10) 600000 600000 600000 600000 Income 890000 159000 574500 524500 Tax @30% 267000 47700 172350 157350 Income after Tax 623000 111300 402150 367150 Add back Depreciation 600000 600000 600000 600000 Annual Cash inflows 1223000 711300 1002150 967150 Cash flows PV factor Present Value Year Var. Cost 10 Var. Cost 15 at 14% Var. Cost 10 Var. Cost 15 0 -6000000 -6000000 1.00000 -6000000 -6000000 1 1002150 967150 0.87719 879078.9 848377.193 2 1002150 967150 0.76947 771121.9 744190.52 3 1002150 967150 0.67497 676422.7 652798.702 4 1002150 967150 0.59208 593353.2 572630.44 5 1002150 967150 0.51937 520485.3 502307.404 6 1002150 967150 0.45559 456566.1 440620.53 7 1002150 967150 0.39964 400496.5 386509.236 8 1002150 967150 0.35056 351312.8 339043.19 9 1002150 967150 0.30751 308169.1 297406.307 10 1002150 967150 0.26974 270323.8 260882.725 Total 4021500 3671500 -772670 -955233.75 182564 Present Value wil increase by -772670-(-955233.75)=$182,564
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