How long will the product be profitable

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Reference no: EM132158781

Question: Find the PW of proceeding with rollout of a new product. The first cost of the production facilities will be $225K. Salvage values will about equal removal costs after production is terminated.

Sales are estimated to be 8000 units the first year, with an annual gradient of 2000 per year for 3 years. Then, demand will fall by 20% per year. The variable cost per unit will be $35 initially, and productivity improvements will lower this by 3% per year. The fixed costs for the production line will be $80K the first year, and these will climb by 2% per year. Overhead, sales, and administrative costs are estimated to be 35% of the fixed and variable production costs for each year.

The initial sales price to wholesalers is $85. It is expected that price cuts of 4% per year will be required to remain competitive. How long will this product be profitable? All the above estimates are in constant value dollars so that inflation has been accounted for. If the interest rate is 12%, what is the PW of this product?

Reference no: EM132158781

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