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 %
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% $_______
  NPV10% $_______
  NPV11% $_______

Expert Answer

Assume the production starts in second year and product life is of three years after its launch. The NPV for the given interest rate of 8% per year is obtained by using following spreadsheet model:

NPV8% = $19,814,767

Keeping all the cells common and by changing the cell B4 to 0.09, 0.10, and 0.11, the respective NPV values are obtained as follows:

NPV9% = $19,810,369.45

NPV10% = $19,805,973.39

NPV11% = $19,801,578.79

As the interest rate increases, the NPV decreases.

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