1. VidMark, a manufacturer of cell phones, is currently developing a new model (VidPhone X70) that will be released on the market when development is complete. This phone will be revolutionary in that it will allow the user to place video phone calls. VidMark is concemed about the development cost and time. They are also worried about market estimates of the sales of the new VidPhone X70. The cost estimates and forecast are given in the table below.

Use the data above to develop a base-case analysis. The project schedule is shown below with timings of the cash flows.

There are several questions that need to be answered for VidMark on this project: a What are the yearly cash flows and their present value (discounted at 12%) of this project? What is the net present value?

b. What is the impact on VidMark if their sales estimates are off by 20%?

c. What is the impact on VidMark if their unit production cost is $85?

d. VidMark thinks that they can cut the development time in half if they spend an extra $1,500,000 on development for this project. If the product is launched a year earlier, then the product will still have a 3-year life but the forecast starting in year 2 will be 48,000, 60,0000, and 50,000. Is it worth it to VidMark to spend the extra money on development?

Transcribed Image Text:

Development Cost Development Time $2,00,000 2 years Ramp-up Cost $750,000 Marketing and Support Cost $500,000/year Unit Production Cost $75 Unit Price $135 Sales and Production Volume Year 3 40,000 Year 4 50,000 Year 5 40,000