Question: Project Costs
Development Cost: $3,500,000 (Over 2 years, so $1,750,000 for Year 1 and $1,750,000 for Year 2)
Ramp Up Cost: $750,000 (Year 2)
Marketing and Support Cost: $500,000/year (Year 2-5)
Unit Production Cost: $75
Unit Price: $135
Sales and Production Volume
Year 3: $35,000
Year 4: $60,000
Year 5: $40,000
Discount Rate: 12%
Part A. What are the yearly cash flows of this project? What is the NPV?
Part B. Assume that your forecasting team re-analyzes the forecast for year 4 and changes that years forecast to 80% of the original 60,000 forecast. What is the new NPV? Under this change to year four would you recommend the project? Why or why not?
Part C. In addition to the change in part B your finance team also believes that the discount rate for this project should only be calculated as 7%. What is the new NPV with the change in forecast for year 4 and change in discount rate? Under these changes would you recommend the project? Why or why not?