Answer:
a. Net present value of this project is $12,181,000.
b. Net present value of this project is $19,743,000.
c. Net present value of this project is $342,000.
Explanation:
a. What is the net present value (at the discount rate of 10%) of this project? (Negative value should be indicated by a minus sign. Enter your answer in thousands of dollars. Round your answer to the nearest thousand.)
Present value of year 1 revenue = (Sales and production volume year 1 * Unit price year 1) / (1 + Discount rate)^1 = (250,000 * $820.00) / (1 + 10%)^1 = $186,363,636.36
Present value of year 2 revenue = (Sales and production volume year 2 * Unit price year 2) / (1 + Discount rate)^2 = (150,000 * $650.00) / (1 + 10%)^2= $80,578,512.40
Year 0 total cost = Development cost + Pilot testing + Debug + Ramp-up cost + Advance marketing = $20,000,000 + $5,000,000 + $3,200,000 + $3,000,000 + $5,400,000 = $36,600,000.00
Present value of Year 1 total cost = (Marketing and support cost + (Sales and production volume year 1* Unit production cost year 1)) / (1 + Discount rate)^1 = ($1,000,000 + (250,000 * $655.00)) / (1 + 10%)^1 = $149,772,727.27
Present value of Year 2 total cost = (Marketing and support cost + (Sales and production volume year 1* Unit production cost year 2)) / (1 + Discount rate)^2 = ($1,000,000 + (150,000 * $545.00)) / (1 + 10%)^2 = $68,388,429.75
Net present value of this project = Present value of year 1 revenue + Present value of year 2 revenue - Year 0 total cost - Present value of Year 1 total cost - Present value of Year 2 total cost = $186,363,636.36 + $80,578,512.40 - $36,600,000.00 - $149,772,727.27 - $68,388,429.75 = $2,180,991.74
Rounding to the nearest thousand, we have:
Net present value of this project = $12,181,000
b. Perot’s engineers have determined that spending $10 million more on development will allow them to add even more advanced features. Having a more advanced chip will allow them to price the chip $50 higher in both years ($870 for year 1 and $700 for year 2). What is the NPV of the project if this option is implemented? (Negative value should be indicated by a minus sign. Enter your answer in thousands of dollars. Round your answer to the nearest thousand.)
Present value of year 1 revenue = (Sales and production volume year 1 * Unit price year 1) / (1 + Discount rate)^1 = (250,000 * $870) / (1 + 10%)^1 = $197,727,272.73
Present value of year 2 revenue = (Sales and production volume year 2 * Unit price year 2) / (1 + Discount rate)^2 = (150,000 * $700) / (1 + 10%)^2= $86,776,859.50
Year 0 total cost = Development cost + Pilot testing + Debug + Ramp-up cost + Advance marketing + additional development cost = $20,000,000 + $5,000,000 + $3,200,000 + $3,000,000 + $5,400,000 + $10,000,000 = $46,600,000.00
Present value of Year 1 total cost = as already obtained in part a above = $149,772,727.27
Present value of Year 2 total cost = as already obtained in part a above = $68,388,429.75
Net present value of this project = Present value of year 1 revenue + Present value of year 2 revenue - Year 0 total cost - Present value of Year 1 total cost - Present value of Year 2 total cost = $197,727,272.73 + $86,776,859.50 - $46,600,000.00 - $149,772,727.27 - $68,388,429.75 = $19,742,975.21
Rounding to the nearest thousand, we have:
Net present value of this project = $19,743,000
c. If sales are only 200,000 the first year and 100,000 the second year, what would the NPV of the project be? Assume the development costs and sales price are as originally estimated. (Negative value should be indicated by a minus sign. Enter your answer in thousands of dollars. Round your answer to the nearest thousand.
Present value of year 1 revenue = (Sales and production volume year 1 * Unit price year 1) / (1 + Discount rate)^1 = (200,000 * $820.00) / (1 + 10%)^1 = $149,090,909.09
Present value of year 2 revenue = (Sales and production volume year 2 * Unit price year 2) / (1 + Discount rate)^2 = (100,000 * $650.00) / (1 + 10%)^2= $53,719,008.26
Year 0 total cost = Development cost + Pilot testing + Debug + Ramp-up cost + Advance marketing = $20,000,000 + $5,000,000 + $3,200,000 + $3,000,000 + $5,400,000 = $36,600,000.00
Present value of Year 1 total cost = (Marketing and support cost + (Sales and production volume year 1* Unit production cost year 1)) / (1 + Discount rate)^1 = ($1,000,000 + (200,000 * $655.00)) / (1 + 10%)^1 = $120,000,000.00
Present value of Year 2 total cost = (Marketing and support cost + (Sales and production volume year 1* Unit production cost year 2)) / (1 + Discount rate)^2 = ($1,000,000 + (100,000 * $545.00)) / (1 + 10%)^2 = $45,867,768.60
Net present value of this project = Present value of year 1 revenue + Present value of year 2 revenue - Year 0 total cost - Present value of Year 1 total cost - Present value of Year 2 total cost = $149,090,909.09 + $53,719,008.26 - $36,600,000.00 - $120,000,000.00 - $45,867,768.60 = $342,148.76
Rounding to the nearest thousand, we have:
Net present value of this project = $342,000
