Hi All,
I am new to the forum and hoping someone could clear this up for me. I don't know whether it is how the question is being structured but I cannot come up with a possible solution so I thought I'll post it.
Product Development
Development costs so far have been 2 million, which includes the construction of a small pilot plant. If it is being decided that the product will not be produced, these facilities have a scrap value of 200,000. If go ahead is agreed however, the company is proposing to spend an additional 8 million on production facilities. Expected life cycle of plant is 10 years, its max production capacity is 150,000 units per month. At the end of the ten year period the factory will have a scrap value of 5% of its original cost. (Depreciation is linear) Two of the company's employees will have to be moved from their current position working on an existing product. This will cause a loss in output and consequent reduction in profits on the existing product of 50,000 per year. Selling price is 2,- with an estimated mark-up on unit variable costs of 60% (unit variable cost are constant). Preliminary market research cost 20,000 and the company believes to sell 130,000 units per month in the first year. Advertising will cost 40,000, if the company decides not to advertise however, sales will only be 120,000/month in the first year. From 2nd year onwards, sales will constantly be at 140,000 per month. Also, there is a 30% chance that a competitor will launch a similiar product; if yes, first years sales will be reduced by 20% from those assumed above. Sales from year 2 onwards will not be affected.
- Calculate NPV assuming a 10-year product life and cost of capital of 6%.
Any help would be massively appreciated... I'm kinda stuck here