Problem: The TitMar Motor Company is considering the production of a new personal transportation vehicle that would be called the PTV.
The PTV would compete directly with the innovative new Segway. The PTV will utilize a three wheel platform capable of carrying one rider for up to 6 hours per battery charge, thatnk to a new battery system developed by TitMar.
TitMar's PTV will sell for substentially less than the Segway but will offer equivalent features. The pro forma financials for the proposed PTV project, including forecasts and assumptionsthat underline them are set out in Exhibit below:
Note that revenue is calculated as follows: price per unit *market share (%) market size, and units sold = revenues / price per unit. The project offers an expected NPV of $9,526,209 and an IRR of 39.82%. Given TitMar's stated hurdle rate of 18%, the project looks like a winner.
Even though the project looks like very good based on management's estimates, it is risky and can turn from a positive-NPV investment to a negative one with relatively modest changes in the key value drivers. Develop a spreasheet model of the project valuation and answer the following questions
Q1. If the firm's market share turns out to be only 5%, what happens to the project's NPV and IRR?
Q2. If the market share remains at 15% and the price of the PTV falls to $4, 500, what is the resulting NPV?
| Assumptions and Predictions |
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Estimates |
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| Price Per unit |
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$4,895 |
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| Market share (%) |
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15% |
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| Market size (Year 1) |
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200,000 units |
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| Growth rate in the market size beginning in Year 2 |
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5.00% |
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| Unit variable cost |
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4,250 |
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| Fixed cost |
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$9,000,000 |
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| Tax rate |
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50% |
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| Cost of capital |
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18% |
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| Investment in NWC |
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5% of the predicted change in firm revenue |
| Initial investment in PPE |
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$7,000,000 |
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| Annual Depreciation (5-year life w/no salvage) |
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$1,400,000 |
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