The General Ford Motors Corporation (GF Motors) is considering developing one of two new car designs. The Vector is a radically designed hybrid between a pickup and SUV. The Trek is a more conventional mid-size SUV design. GF Motors assumes both designs would generate sales for the next 10 years. Both designs would sell for $25,000. Estimates for the design and development costs, first-year production costs, and first-year demand are given below.

The production and selling price would rise with inflation (estimated to be 5% per year with a standard deviation of 1.5%). Demand in future years will be forecast to be equal to the previous year’s demand with a standard deviation of 10% of the forecast.

GF Motors uses a 10% hurdle rate (i.e., the discount rate in calculating NPV) when evaluating new projects. Which car design should they pursue, if any?

 

Minimum Most - Likely Maximum Design / Development Cost First - Year Production Cost $ 4.3 billion 4.5 billiion 5.5 billion 18,200.0 $ 18,600.0 $ 21,800.0 First _ year sales 10000 150000 200000 Esitmates for the vector Most - Likely $4.3 Billion 18,400 $ Minimum Maximum Design/Development Cost First - Year Production cost $ First - Year Sales $4.1 Billion $4.5 Billion 17,600 $ 18,800 75000 100000 120000 Estimates for the Trek