The Tuff Wheels was getting ready to start its development project for a new pro

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.

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.

Assume all cash flows occur at the end of each period.

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. Perform all calculations using Excel. Do not round any intermediate calculations. Round your answer to the nearest thousand.)

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. Perform all calculations using Excel. Do not round any intermediate calculations. Round your answer to the nearest thousand.)

c. 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 $ 800,000 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 $ 160 Interest rate 8 % YEAR 2 PROJECT SCHEDULE KIDDY DOZER Development Pilot Testing Ramp-up Marketing and Support Production and Sales YEAR 1 YEAR 3 YEAR 4 91 3 34 91 92 9 & O1 02 % 9 Q 03 03 94

Explanation / Answer

(1898148.3+2957819.55+2738720.4)

(1342592.7+2443416.15+2262421.2)

If units sold are decreased from 60000 units to 50000,

NPV is decreased by $1,546,258 (7594688-6048430)

If units sold are increased from 60000 units to 70000,

NPV is increased by $1,546,258 (9140946-6048430)

(1880733.55+2903796+2664031.35)

(1863636.55+2851238.7+2592036.75)

(1846847.05+2800095.9+2522608.95)

If discount rates increases the NPV reduces.

a. Net present value Yr1 Yr 2 Yr 3 A Development cost -800000 B Pilot Testing -200000 C Ramp-Up Cost -400000 D Marketing and Support cost -150000 -150000 -150000 E Sales - 60000*160 9600000 9600000 9600000 F Production cost = 60000*100 -6000000 -6000000 -6000000 A+B+C+D+E+F=G Free cash flows 2050000 3450000 3450000 H Discounting factor @ 8% 0.925926 0.857339 0.793832 G*H Present value of cash flow 1898148.3 2957819.55 2738720.4 Net present value 7594688.25

(1898148.3+2957819.55+2738720.4)

$7,594,688

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