Your company is considering investing in a new product line. Initial Investment in the product line is
Question:
Your company is considering investing in a new product line. Initial Investment in the product line is expected to be 1.2 million dollars. You expect the first month’s sales to be 900 units per month and then increase each month by 200 units. Variable costs start at $50 per unit but are expected to go down to $45 when the number of units goes above 1,600. Advertising costs are expected to be $10,000 a month.
1. Suppose you would like to recover your investment within the first year. Disregard time value of money and taxes. What should be the price charged in order to breakeven (round to the nearest dollar)?
2. Now suppose you are considering different scenarios of sales. Pattern of increase over the months stays the same but initial month’s sales are either +/- 20%. Assume price of the product is the same throughout the year and stands at $105. What is the minimum dollar return you can expect on your investment? (Dollar return = total income – initial investment).
3. Consider a different cash flow alternative: you invest 1,200,000 in a high risk opportunity which yields $160,000 each year for the next 10 years (10 payments – the first received in 12 months). What would be the IRR of this investment? (enter your answer in percentages - round to two digits after the decimal point – 9.2582% will be entered as 9.26)