Brianna Wilkins is the president and CEO of Solid Sound, a company that manufactures and sells a line of gear for the home entertainment market, including televisions, stereo systems, and home theater systems. Respected throughout the industry for bringing many high$-$quality, innovative products to market, Brianna is considering adding a new speaker system to her product offerings. The speaker market has changed dramatically over the past decade. Originally, high$-$fidelity aficionados knew that to reproduce sound covering the fullest range of frequencies, a speaker system had to be large and heavy. The trouble was that such a system was too large for anything but the biggest rooms, and consumer were reluctant to spend thousands of dollars and give up valuable room space to get the excellent sound these speakers could reproduce. The trend has changed during the past several years. Consumers still want good sound, but they want it from smaller boxes. Brianna$$s R&D team has been working on new wireless speaker system that would allow for multiple configurations, from a stand$-$alone single speaker, to the use of several types of speakers to simulate a home theater system, but at a lower cost and with more versatility. For example, you could disconnect one of the wireless speakers from your TV in the home theater environment and use it in the kitchen or outside, etc. Consumers and critics are thrilled with the music from early prototypes, claiming these speakers have the best balance of sound and size. Brianna is extremely encouraged by these early reviews, but wants analyze the financials before bringing this new system to market. After consulting with economists, market analysts, employees in her own company, and employees from other companies, Brianna is confident that revenues for these speakers in the first year would be around $$6$ million. She must also figure that a small percentage of speakers will be damaged in transit or returned by dissatisfied customers. These returns and allowances $($R&As$)$ are usually calculated as $3\%$ of gross revenue; net revenue is the gross minus the R&As$.$ Brianna believes for the first year labor costs will be $$915,100,$ materials costs will be $$915,350,$ and overhead costs will be $$1,536,120.$ Additionally, selling and administrative $($S&A$)$ costs need to be included. These are harder to estimate, but the industry standard has been $18\%$ of net revenue. Finally, the tax rate for profits is $3\%..$ Brianna would like to create a spreadsheet model for four years of this new product. She wants to account for increases year$-$over$-$year for gross revenue, labor costs, material costs, and overhead costs in this model. Again, these are difficult to estimate, but she thinks that gross revenue will increase by $9\%$ per year, labor costs by $4\%$ per year, material costs by $6\%$ per year, and overhead costs by $3\%$ per year. However, she assumes the R&A$,$ S&A$,$ and tax rates will remain unchanged over the course of four years.

When asked about the rate at which future profits should be discounted, the president is unsure. Apparently, she was not involved in previous multi$-$year analyses for the company, if they were done. $($Note: in a subsequent conversation with the company$$s CPA, you find out that the firm has a standing working capital line of credit, carrying a $6\%$ APR, that would probably be used to finance the expenditures associated with the new product.$)$

The conversation does, however, turn to potential competition. The president is worried that a well$-$regarded competitor, Bose, may enter the market with a similar product. If this happens, the company will not be able to sell as much as projected $($and won$$t need to make as much, either$).$ The president guesses that sales might be reduced by one third.

After these preliminary conversations, she is ready to tackle the problem. she realizes that she is missing information about a key component: the possible uncertainty in all the various estimates that have been made. She will need to quantify that uncertainty, and factor it into her analysis. Her job is to perform an analysis that will yield an projected NPV for the project, plus some idea of the likelihood of alternate results.