Managers at GoPro are considering entering AI-augmented camera market that they expect to be strong over the next five years. To enter the market successfully, GoPro will need to build a manufacturing facility, spend money on design, marketing etc. Is the project worth undertaking? The estimates are as follows. The cost of building a new manufacturing facility is

$220 million and its salvage value after 5 years is only $10 million. The initial (year 1) sales are estimated at 7,000,000 units. The inflation rate, real cost of capital and tax rate are assumed to be constant over time. Assume that Sales Revenue per unit, Variable cost and Cash Fixed cost grow over time at the rate of inflation. 

a) What is the Net Present Value of this project? 

b) Would you invest in the project on the basis of its NPV? Explain 

c) Assuming that year 2 sales growth rate is 30%, what level of unit sales in year 1 will be just sufficient to accept this project? Key Assumptions-Sales Growth Rate -25%in year 2

 

(Change in Sales Growth Rate from previous period) in year3-30%, -45% in year-3, -55% in year-4 ,Inflation Rate in year-1 is 1.5%,Real Cost of Capital-15% in year-1,Tax Rate in year-1-40%,Sales Revenue / Unit-$45 is in year-1,Variable Cost / Unit-$27 in year-1,Cash Fixed Costs-$2,50,00,000 in year-1 , Discount rate-10%  

d) Compute cash flow forecast for year 0 to 5 

Answer rating: 100% (QA)

To calculate the Net Present Value NPV of the project and determine whether it is worth undertaking we need to calculate the cash flows for each year ... View the full answer