Question

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 pro-duce the new Kiddy Dozer. The table below contains the relevant information for this project.
Development Cost............. $ 1,000,000
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 below. 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.


a. What are the yearly cash lows and their present value (discounted at 8 percent) of this project? What is the net present value?
b. What is the impact on NPV for the Kiddy Dozer if the actual unit sales are 50,000 per year or 70,000 per year?
c. What is the effect caused by changing the discount rate to 9, 10, or 11percent?


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  • CreatedApril 09, 2014
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