It is January 1, 2020, and you have recently started a new company, GreenDrone, that

produces flying drones for garden maintenance. You are still at the product development

stage but would like to evaluate the financial feasibility of the project. Here are some

information about the company:

- R&D expenditures. In order to develop the drones, you need to hire an engineer for

3 years at an annual salary of $80,000. The salary is paid bi-monthly, midway through

the month and at the end of the month in equal amounts, i.e. $80,000/24 per payment

for the first year. To stay competitive, you expect you will have to grow the annual

salary at a rate of 2%, starting the next year. The engineer contract starts today, i.e.,

on January 1, 2020.

- Production cost. Once the product is developed in 3 years (January 1 2023), you

will start the production of your drones. Each product is expected to cost $520 to

produce. The cost is to be paid to the supplier at the beginning of a month. The

production costs rise by 4% per year; you will sell drones for the next 5 years.

- Pricing and sales. You plan to sell 500 drones per month, with cash flows at the end

of each month. Production will remain constant for the entire 5 year production run.

All sales for products produced in a month are collected at the end of the month.

The appropriate discount rate is 3%, annually compounded. What is the price that that

the firm needs to charge to make the project profitable, i.e. NPV is positive?).

If the firm expects it can raise prices by 3% per year, what is the minimum initial selling

price for the project to breakeven?