Answered step by step
Verified Expert Solution
Question
1 Approved Answer
1. You have founded a company to sell thin client computers to the food processing industry for Internet e-commerce transaction processing. Before investing in your
1. You have founded a company to sell thin client computers to the food processing industry for Internet e-commerce transaction processing. Before investing in your new company, a venture capitalist has asked for a five year pro-forma income statement showing unit sales, revenue, total variable cost, marketing expense, fixed cost, and profit before tax. You expect to sell 1,600 units of the thin client computers in the first year for a price of $1,800 each. Swept along by Internet growth, you expect to double unit sales each year for the next five years. However, competition will force a 15% decline in price each year. Fortunately, technical progress allows initial variable manufacturing costs of $1,000 for each unit to decline by 6% per year. Fixed costs are estimated to be $1,000,000 per year. Marketing expense is projected to be 14% of annual revenue. When it becomes profitable to do so, you will lease an automated assembly machine that reduces variable manufacturing costs by 20% but doubles annual fixed cost; the new variable manufacturing cost will also decline by 6% per year. Net Present Value (NPV) will be used to aggregate the stream of annual profits, discounted at 15% per year. Ignoring tax considerations, build a spreadsheet model for the venture capitalist. How many units will you need to sell in the first year (1) to break even in the first year or (2) to break even in the second year? To what parameters is NPV most sensitive? Prepare a managerial report summarizing your findings
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started