1 The Tuff Wheels was getting ready to start their development project for a new product to be added to its small motorized vehicle line for children. The new product is called the Kiddy Dozer. It will look a miniature bulldozer, complete with caterpillar tracks and a blade. Tuff Wheels has forecasted the demand and the cost to develop and produce the new Kiddy Dozer. The table below contains the relevant information for this project.

Tuff Wheels has also provided the project plan shown below. As can be seen in the project plan the company thinks that the product life will be three years until a new product must be created.Tuff Wheels has also provided the project plan shown below. As can be seen in the project plan the company thinks that the product life will be three years until a new product must be created.

a. What are the yearly cash flows and their present value (discounted at 8%) of this project? What is the net present value?

b. What is the impact on NPV for the Kiddy Dozer if the actual sales are 50,000 per year or 70,000 per year?

c. What is the effect caused by changing the discount rate to 9%, 10%, or 11%?

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Development Cost Estimated Development time Pilot Testing Ramp-up Cost Marketing and Support Cost Sales and Production Volume Unit Production Cost Unit Price Interest rate $1,000,000 9 months $200,000 $400,000 $150,000 per year 60,000 per year $100 $170 8%