You have founded a company to sell thin client computers to the food processingindustry for Internet e-commerce transaction processing. Before investing in yournew company, a venture capitalist has asked for a five year pro-forma incomestatement showing unit sales, revenue, total variable cost, marketing expense,fixed cost, and profit before tax. You expect to sell 1,600 units of the thin clientcomputers in the first year for a price of $1,800 each. Swept along by Internetgrowth, you expect to double unit sales each year for the next five years.However, competition will force a 15% decline in price each year. Fortunately,technical progress allows initial variable manufacturing costs of $1,000 for eachunit to decline by 6% per year. Fixed costs are estimated to be $1,000,000 peryear. Marketing expense is projected to be 14% of annual revenue. When itbecomes profitable to do so, you will lease an automated assembly machine thatreduces variable manufacturing costs by 20% but doubles annual fixed cost; thenew variable manufacturing cost will also decline by 6% per year. Net PresentValue (NPV) will be used to aggregate the stream of annual profits, discounted at15% per year. Ignoring tax considerations, build a spreadsheet model for theventure capitalist. How many units will you need to sell in the first year (1) tobreak even in the first year or (2) to break even in the second year? To whatparameters is NPV most sensitive? Prepare a managerial report summarizing yourfindings.

NPV stands for Net Present Value which states the difference among the PV of inflows as well as the…

Answered: ou have founded a company to sell thin…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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