The manager of a company that produces drones estimates that the annual demand for a new model of drones during the current year (assumed to be year 1) is 100,000. Demand is expected to grow at a rate of 4% each year. If the company builds a plant that can produce x units of the product each year (i.e., builds a capacity of x units), it will incur a one-time investment cost of $22x at the end of the current year. (Note that the capacity is the maximum quantity that the plant can produce. 

Assume that the company produces the smaller demand and capacity each year.) Each unit of this device sells for $25. Each unit of the product manufactured incurs a variable production cost of $12. Also, the company incurs a cost of $2.50 per year to operate/maintain each unit of capacity. Finally, assume that the discount rate, in this case, is 10% and all the revenue and cost of each year are incurred at the end of that year.

You are required to do the following.

1. Define range names for all the inputs, apply them in formulas, and paste the range names on the worksheet.

2. Construct a model to calculate the net present value of the investment over six years for any given capacity level.

3. Use a one-way data table to analyze how the level of capacity built impacts the net present value of the total profit over the next six years. You should change the capacity from 100,000 to 122,000 in increments of 1,000.

4. Based on your result in question (3), create a scatter chart to demonstrate how the net present value changes with the capacity level from 100,000 to 122,000. Include in the chart a chart title and axes titles.

5. What capacity level maximizes the company’s expected net present value of total profit over the upcoming six years? Highlight the largest NPV among the list of NPVs using conditional formatting.

Answer rating: 100% (QA)

Year 1 demandd 1 100000 Demand growth 3 Let maximum capacity of the plant be x One time investment c... View the full answer