Exhibit 2-2

A small sporting goods company is considering investing $2000 in a project at the start of year 1 that will produce volleyballs over the next five years. The company plans to produce and sell 200 volleyballs in the first year, and expects that volume to grow by 10% each year thereafter. The unit selling price forecast the company has developed is $20 in year 1, $22 in year 2, $25 in year 3, $28 in year 4, and $31.50 in year 5. Variable costs are forecast to be $15 per unit produced, and there will be a fixed overhead cost in each year of $500. (Unless otherwise indicated, assume that all cash flows occur at the end of the year.)

Refer to Exhibit 2-2. Use the above information to develop a simple cash flow sheet, and then calculate the project value assuming a 10% discount rate. What is your answer? (Please use the excel model, SmallSportingGoodsCompanyNPV_My_Students.xlsx in Chapter 2.)

Answer: