You are entering the widget business. It costs$500,000, payable in year 1, to develop a prototype.This cost can be depreciated on a straight-line basisduring years 1–5. Each widget sells for $40 and incursa variable cost of $20. During year 1, the market sizeis 100,000, and the market is growing at 10% peryear. You believe you will attain a 30% market share.Profits are taxed at 40%, but there are no taxes onnegative profits.a. Given your other assumptions, what market share isneeded to ensure a total free cash flow (FCF) of $0over years 1 to 5? (Note: FCF during a year equalsafter-tax profits plus depreciation minus fixedcosts, if any.)b. Explain how an increase in market share changesprofit.c. Explain how an increase in market size growthchanges profit.d. Use Excel’s auditing tool to show how the marketgrowth assumption influences your spreadsheet.
You are entering the widget business. It costs
$500,000, payable in year 1, to develop a prototype.
This cost can be
during years 1–5. Each widget sells for $40 and incurs
a variable cost of $20. During year 1, the market size
is 100,000, and the market is growing at 10% per
year. You believe you will attain a 30% market share.
Profits are taxed at 40%, but there are no taxes on
negative profits.
a. Given your other assumptions, what market share is
needed to ensure a total
over years 1 to 5? (Note: FCF during a year equals
after-tax profits plus depreciation minus fixed
costs, if any.)
b. Explain how an increase in market share changes
profit.
c. Explain how an increase in market size growth
changes profit.
d. Use Excel’s auditing tool to show how the market
growth assumption influences your spreadsheet.
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