You have founded a company to sell thin client computers to the food processing industry for Internet transaction processing. Before investing in your new company, a venture capitalist has asked for a five-year pro-forma income statement showing unit sales, revenue, total variable cost, marketing expense, fixed cost, and profit before tax.

In the first year, you expect to sell 2,600 units of the thin client computers for 180 each. Swept along by Internet growth, you expect to double unit sales each year for the next five years. However, competition will force a 13% decline in price each year per year. Marketing expense is projected to be 24% of annual revenue. When it becomes profitable to do so, y

Fortunately, technical progress allows initial variable manufacturing costs of 100 for each unit to decline by 16% per year. Fixed costs are estimated to be 100,000 you will lease an automated assembly machine that reduces variable manufacturing costs by 25% but doubles the annual fixed cost; the new variable manufacturing cost will also decline by 16% per year. Net present value (NPV) will aggregate the stream of annual profits, discounted at 15% per year.

a) Ignoring tax considerations, build a spreadsheet for the venture capitalist.

b) How many units do you need to sell in the first year to break even in the first year?

c) How many units do you need to sell in the first year to break even in the second year?

Answer rating: 100% (QA)

To provide the required information lets go step by step a Proforma Income Statement Well start by creating a fiveyear proforma income statement showi... View the full answer