Demand for a new product is estimated as 50,000 units next year (year 2) and is expected
Question:
Demand for a new product is estimated as 50,000 units next year (year 2) and is expected to grow at 5% per year for the next 10 years (years 2 to 11). The management needs to decide the capacity of a new factory to be built for this product. Following data have been collected:
Size | Annual capacity (units) | Building cost | Annual operating cost |
Small | 50,000 | $800,000 | $20,000 |
Medium | 60,000 | $900,000 | $25,000 |
Large | 70,000 | $1,000,000 | $30,000 |
The factory with take 1 year to build, so it will be ready for production in year 2 (now is the beginning of year 1). The selling price of product will be $5 per unit and variable cost will be $2 per unit. Any excess demand will be lost (assume at no cost). If demand is less than capacity, the factory will produce enough to meet the demand. Assume all cash flows occur at the end of the year, including the building cost (will occur at the end of year 1).
a. Create below a spreadsheet model of this problem. Assuming a small size (50,000 annual capacity) factory is built but make your model flexible so it can also work for other capacities. Use vlookup to pickup the building cost and annual operating cost associated with the annual capacity. Calculate the NPV of this project using discount rate of 7%.
b. Use one-way data table to determine which capacity has the highest NPV.
Quantitative Methods for Business
ISBN: 978-0324651751
11th Edition
Authors: David Anderson, Dennis Sweeney, Thomas Williams, Jeffrey cam