A small sporting goods company is considering investing P100,000 in a project at the start of year 1 that will produce volleyballs over the next five years. The company plans to produce and sell 200 volleyballs in the first year and expects that volume to grow by 10% each year thereafter. The unit selling price forecast the company has developed is P1,000 in year 1, P1,100 in year 2, P1,250 in year 3, P1,400 in year 4, and P1,575 in year 5. Variable costs are forecast to be P750 per unit produced, and there will be a fixed overhead cost in each year of P25,000. (Unless otherwise indicated, assume that all cash flows occur at the end of the year.) a) Use the above information to develop a simple cash flow proforma sheet, and then apply Excel's NPV function to calculate the project value assuming a 10% discount rate. What is your answer? b) Suppose the company thinks it may be able to produce and sell more than currently planned. What growth rate of production would produce an NPV of P500,000? c) Suppose instead that the company thinks it can reduce its variable cost rate. What rate would produce an NPV of P500,000?
A small sporting goods company is considering investing P100,000 in a project at the start of year 1 that will produce volleyballs over the next five years. The company plans to produce and sell 200 volleyballs in the first year and expects that volume to grow by 10% each year thereafter. The unit selling price forecast the company has developed is P1,000 in year 1, P1,100 in year 2, P1,250 in year 3, P1,400 in year 4, and P1,575 in year 5. Variable costs are forecast to be P750 per unit produced, and there will be a fixed overhead cost in each year of P25,000. (Unless otherwise indicated, assume that all cash flows occur at the end of the year.)
a) Use the above information to develop a simple cash flow proforma sheet, and then apply Excel's NPV
b) Suppose the company thinks it may be able to produce and sell more than currently planned. What growth rate of production would produce an NPV of P500,000?
c) Suppose instead that the company thinks it can reduce its variable cost rate. What rate would produce an NPV of P500,000?
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