Question

. For a new product, sales volume in the first year is estimated to be 50,000 units and is projected to grow at a rate of 7% per year. The selling price is $100 and will increase by $10 each year. Per-unit variable costs are $22 and annual fixed costs are $1,000,000. Per-unit costs are expected to increase 4% per year. Fixed costs are expected to increase 10% per year. Develop a spreadsheet model to predict the net present value of profit over a three-year period, assuming a 4% discount rate.

Answer 1

Answer:

The NPV value of the profit over the three year period is $9,900,966.32  

Explanation:

The NPV of the profit over three year period was computed by first of all incorporating all growth assumptions relating to sales volume,sales price,variable and fixed costs.

With the assumptions incorporated , I calculated the sales revenue,variable and fixed costs per year,hence the profit figure is sales less variable and fixed costs.

Finally I discounted the profit to present using the formula 1/(1+r)^N,where r is the rate of 4% and N the relevant year.

Kindly find attached spreadsheet

Download xlsx