Muffalump Toys is considering producing and selling a new
Muffalump Toys is considering producing and selling a new line of self-driving toy trucks. Muffalump projects the first year volume to be 3,000 units, increasing by 500 units per year for 3 years, then decreasing by 300 units for the next 2 years as the market achieves a stable equilibrium. The contribution margin is expected to be $50 per unit. The cost of the production facility is $450,000, payable upfront. Muffalump will use straight-line depreciation to spread the cost of the facility over its 5-year useful life. Advertising will be $70,000 during the first year, and $50,000 for each of the next 4 years. The costs of operating the facility will be $15,000 per year for the first 3 years, then increase to $20,000 for the last 2 years. Unless otherwise stated, annual costs are spread evenly throughout the year. The expected cost of capital (CoC) is 6%.
The President, Sally Mander, wants you to present your analysis for the first 5 years to the Board of Directors as part of the process of deciding whether Muffalump should launch the new product. Answer the questions below.
What is the NPV of the new product at the expected CoC?
What is the NPV of the new product if the CoC drops to 5.0%?
If the CoC is 5.0%, what is the Payback Period?