Reference no: EM133025250
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 $800,000
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 $160
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.
Required -
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?