Tuff wheels was getting ready to start

Problem 3-10

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.

  Development cost

$

1,050,000

  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

$

185

  Interest rate

8

%

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.

Picture

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. Round your answer to the nearest thousand.)

  Net present value

$

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. Round your answer to the nearest thousand.)

  NPV50,000

$

  NPV70,000

$

c.

What is the effect on NPV caused by changing the discount rate to 9%, 10%, or 11%? (Enter your answer in thousands of dollars. Round your answer to the nearest thousand.)

  NPV9%

$

  NPV10%

$

  NPV11%

$

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Problem 3-11

Perot Corporation is developing a new CPU chip based on a new type of technology. Its new chip, the Patay2 chip, will take two years to develop. However, because chip manufacturers will be able to copy the technology, it will have a market life of two years after it is introduced. Perot expects to be able to price the chip higher in the first year, and it anticipates a significant production cost reduction after the first year as well. The relevant information for developing and selling the Patay2 is given below.

  PATAY2 CHIP PRODUCT ESTIMATES

  Development cost

$

20,000,000

  Pilot testing

$

5,000,000

  Debug

$

3,800,000

  Ramp-up cost

$

3,000,000

  Advance marketing

$

6,600,000

  Marketing and support cost

$

1,000,000

 per year

  Unit production cost year 1

$

655.00

  Unit production cost year 2

$

545.00

  Unit price year 1

$

820.00

  Unit price year 2

$

650.00

  Sales and production volume year 1

250,000

  Sales and production volume year 2

150,000

  Interest rate

10

%

Picture

a.

What is the net present value (at the discount rate of 10%) of this project? (Negative value should be indicated by a minus sign. Enter your answer in thousands of dollars. Round your answer to the nearest thousand.)

  Net present value

$

b.

Perot’s engineers have determined that spending $10 million more on development will allow them to add even more advanced features. Having a more advanced chip will allow them to price the chip $50 higher in both years ($870 for year 1 and $700 for year 2). What is the NPV of the project if this option is implemented? (Negative value should be indicated by a minus sign. Enter your answer in thousands of dollars. Round your answer to the nearest thousand.)

  Net present value

$

c.

If sales are only 200,000 the first year and 100,000 the second year, what would the NPV of the project be? Assume the development costs and sales price are as originally estimated. (Negative value should be indicated by a minus sign. Enter your answer in thousands of dollars. Round your answer to the nearest thousand.)

  Net present value

$

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