Answered Essay: The Tuff Wheels was getting ready to start its development project for a new product to be added to

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 $ 1,450,000
  Estimated development time 9 months
  Pilot testing $ 200,000
  Ramp-up cost $ 400,000
  Marketing and support cost $ 150,000 per year
  Sales and production volume 60,000 per year
  Unit production cost $ 100
  Unit price $ 225
  Interest rate 8 %
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 $______

Expert Answer

Assume the production starts in second year and product life is of three years after its launch. The NPV for the given production volume of 60,000 units per year is obtained by using following spreadsheet model:

NPV60,000 = $19,814,767

By changing the cell B1 to 50,000 and 70,000 the respective NPV values are obtained as follows:

NPV50,000 = $16,070,759

NPV70,000 = $23,558,775

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