Financial modeling for the virtual reality entertainment system (25 POINTS; APPROXIMATELY 2 HOURS) The software giant would like to build a quantitative financial model for the development commercialization of the proposed Virtual Reality (VR) entertainment system. NominaUb011 case) costs and schedules for the project are as follows: Costs ("Magnitude"): Development Costs: $35,000,000/year Sales and Production Volume: 500.000 units/year Unit Sales Price: not specified (see part (a) below) Unit Production cost: $ 150/unit Ramp-up cost: $500,000/quarter Marketing and Support cost: $2, 500,000/year Schedule ("Timing"): Development: 12 months (Year 1, Q1-Q4) Ramp-up: 6 months (Year 1, Q4; Year 2, Q1) Marketing and Support: ongoing (starts Year 2, Q1 until Year 4, Q4) Production and Sales: ongoing (starts Year 2, Q2 until Year 4, Q4) The software giant has asked you to model the impact of the unit sales price on the Net Present Value (NPV) of the project. Perform a four year quarterly NPV analysis (assume a discount factor of 10% per year) in order to determine the following: The minimum value, of the unit sales price for the product that will result in a positive NPV by the end of year 4. What is the trade-off law between NPV and unit sales price? What price would you recommend that the software giant charge a wholesale distributor (e.g. Costco) for 1 unit of the VR entertainment system? Explain your answer. What is the expected NPV based on your recommended sales price from part (c) Financial modeling for the virtual reality entertainment system (25 POINTS; APPROXIMATELY 2 HOURS) The software giant would like to build a quantitative financial model for the development commercialization of the proposed Virtual Reality (VR) entertainment system. NominaUb011 case) costs and schedules for the project are as follows: Costs ("Magnitude"): Development Costs: $35,000,000/year Sales and Production Volume: 500.000 units/year Unit Sales Price: not specified (see part (a) below) Unit Production cost: $ 150/unit Ramp-up cost: $500,000/quarter Marketing and Support cost: $2, 500,000/year Schedule ("Timing"): Development: 12 months (Year 1, Q1-Q4) Ramp-up: 6 months (Year 1, Q4; Year 2, Q1) Marketing and Support: ongoing (starts Year 2, Q1 until Year 4, Q4) Production and Sales: ongoing (starts Year 2, Q2 until Year 4, Q4) The software giant has asked you to model the impact of the unit sales price on the Net Present Value (NPV) of the project. Perform a four year quarterly NPV analysis (assume a discount factor of 10% per year) in order to determine the following: The minimum value, of the unit sales price for the product that will result in a positive NPV by the end of year 4. What is the trade-off law between NPV and unit sales price? What price would you recommend that the software giant charge a wholesale distributor (e.g. Costco) for 1 unit of the VR entertainment system? Explain your answer. What is the expected NPV based on your recommended sales price from part (c)
