Question 11. You are evaluating a possible project for your company involving the development of a new kind of computer mouse. The project requires an initial investment of $32 million to be made in each of the next three years. Sales and profits will begin in the 4th year. You expect to have sales in Year 4 of $24 million and cash profits of $7.8 million. Then, profits are expected to increase 6% annually. Assume for simplicity that all cashflows occur at the end of the year. The cost of capital is 12%, would you make the decision to start this project? (hint: you might want to consider the project's NPV) *

5 points

For sure.

No way.

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Question 12. Continue from Question 11, suppose you have another alternative project to invest in a new kind of keyboard. This alternative project also requires an initial investment of $32 million to be made in each of the next three years. Sales and profits will also begin in the 4th year, and this is where the two projects differ. This project is expected to generate a sale volume of 500 thousand keyboards in year 4 at the price of $20/keyboard, and it costs $2.2 to produce a keyboard. Then, sales volume is expected to increase 4% annually while price and cost stay the same. Assume no inventory, and for simplicity that all cashflows occur at the end of the year. The cost of capital both projects is 12%. Would you choose to invest in making mouse or keyboard?

Mouse.

Keyboard.

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Question 13. You are not sure that the discount rate is really 12%. What happens to your decision if the discount rate rises to 14%? *

5 points

I'd go for mouse.

I'd go for keyboard.

Other:

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Question 14. You have the opportunity to increase the growth rate of sales volume of Project Keyboard to 6% instead of 4%. If you still have $20 million in your budget, would you be willing to make extra investment (today) to get this higher growth?

Yes

No