The Tuff Wheels was getting ready to start its development project for a new product to be added to its 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 following table contains the relevant information for this project. Development cost $ 900,000 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 $ 170 Interest rate 8 % Tuff Wheels also has provided the project plan shown as follows. 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. b. What is the impact on NPV for the Kiddy Dozer if the actual sales are 50,000 per year? 70,000 per year? 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%?
The Tuff Wheels was getting ready to start its development project for a new product to be added to its 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 following table contains the relevant information for this project. Development cost $ 900,000 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 $ 170 Interest rate 8 % Tuff Wheels also has provided the project plan shown as follows. 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. b. What is the impact on NPV for the Kiddy Dozer if the actual sales are 50,000 per year? 70,000 per year? 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%?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
The Tuff Wheels was getting ready to start its development project for a new product to be added to its 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 following table contains the relevant information for this project.
Development cost $ 900,000
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 $ 170
Interest rate 8 %
Tuff Wheels also has provided the project plan shown as follows. 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.
b. What is the impact on NPV for the Kiddy Dozer if the actual sales are 50,000 per year? 70,000 per year?
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%?
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 8 steps with 12 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education