Similarly, calculate the investor's rate of return in Example 19.2 with the following changes:

(a) The product life cycle is extended from three to seven years.

(b) In year 3, spend \(\$ 1 \mathrm{MM}\) to develop an improved product, which will be on sale in year 4 .

(c) In years 4,5 , and 6 , increase the advertising budget from \(\$ 2.5 \mathrm{MM}\) to \(\$ 3.5 \mathrm{MM}\).

Because of (b) and (c), the estimated sales volume and selling price are given as follows:

(d) Instead of having a fixed amount of working capital, it is suggested that the working capital be adjusted from year to year at \(\$ 40 /\) unit. Plot the cumulative project cash flow from the beginning of product development to the end of product life cycle.

Data From Example 19.2:-

Sales are expected to pick up slowly after product launch as consumers start to take note of the air purifier. However, sales and the unit price tend to decrease at some point in time (Figure 1.2). After a careful review, the marketing team suggests a more realistic estimate of the sales volume and a pricing strategy in the following table.

To accommodate the increased production in the second year, the engineering team recommends that the equipment cost be increased to \($5MM\). Use the five-year class life in the Modified Accelerated Cost Recovery System for depreciation. The market value of the equipment after three years is now estimated to be $2.5MM.

Figure 1.2:-

Transcribed Image Text:

Year Unit Sales Selling Price, $ 45 4 60,000 300 5 70,000 275 6 55,000 250 7 40,000 250