Question
Rich Products is considering launching a new color printer that is designed to provide a better way to print color photos. They are forecasting increasing
Rich Products is considering launching a new color printer that is designed to provide a better way to print color photos. They are forecasting increasing sales for the first three years, but then a decrease in year four as competitors arrive on the scene.
Year | Unit Sales |
1 | 12,000 |
2 | 14,000 |
3 | 16,000 |
4 | 15,000 |
They plan to sell the units for $26.50 in years 1-2, $27.50 in year 3, but only $23.00 in year 4 when competitors begin to put downward pressure on the price. The cost to produce the devices is $13.50 per unit, while their fixed costs are $26,000 per year. The marketing department believes the printer will actually provide some competition to the other company producing printers, cutting into sales of their current products at a level of $2000 per year. They estimate that the project will require an initial increase in current assets of $10,000, and an increase in current liabilities of $6000. They assume full recovery of NOWC at the end of the project. The cost of the assembly equipment will be $300,000, with additional shipping costs of $4000, and installation costs of $20,000. The equipment is classified as 3-year rate (year one: 33%, year two: 45%, year three: 15%, year four:7%) . The operations manager believes the equipment can be salvaged at the end of the project for $84,000. The marginal tax rate is 34% and the required return on the project is 24%.
1) What is the NPV of the project?
2) Going back to the original project description and estimates, suppose the production manager comes back with a revised estimate of how much it will cost to produce the printer. She indicates a projected shortage of raw materials could push the cost to produce the devices to $15.50 per unit. What happens to the NPV?
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