The Tuff Wheels was getting ready to start its development project for a new product to
be added to their small motorized vehicle line for children. The new product
is called the
Kiddy Dozer. It will look like a miniature bulldozer, complete with caterpillar tracks and a
blade. Tuff Wheels has forecasted the demand and the cost to develop and
produce
the
new Kiddy Dozer. The table below contains the relevant information for this project.
Development cost
$850,000
Estimated development
9 months
time
Pilot testing
$200,000
Ramp-up cost
$400,000
Marketing and support cost$ 150,000
per
year
Sales and production
60,000
per
volume
year
Unit production cost
Unit price
ии
$
100
$
165
Interest rate
8%
Tuff Wheels also has provided the project plan shown below. As can be seen in the
project plan, the company thinks that the product life will be three years until a new
product must be created.
PROJECT SCHEDULE
KIDDY DOZER
Development
Pilot Testing
Ramp-up
Marketing and Support
Production and Sales
YEAR 1
YEAR 2
YEAR 3
YEAR 4
0, 0, 0, 0, 0, 0, 0, 9 9 9 9 g 2 g a
a. What is the net present value (discounted at 8%) of this project? Consider all costs and
expected revenues. (Enter your answer in thousands of dollars. Round your answer
to the nearest thousand.)
Net present
value
b. What is the impact on NPV for the Kiddy Dozer if the actual sales are 50,000 per
year? $70,000 per year? (Enter your answer in thousands of dollars. Round your
answer to the nearest thousand.)
NPV50,000
NPV70,000
c. What is the effect on NPV caused by changing the discount rate to 9 %, 10%, or
11%? (Enter your answer in thousands of dollars. Round your answer to the nearest
thousand.)
NPV9%
NPV 10%
NPV 11%
555