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CASE DESCRIPTION Mike's Motor Cycles is a premier manufacturer of motorcycles, which they sell around the world. Their products are broken down into the following segments with the number of versions indicated Off-road Street Touring 3-Wheeler The company has seen sales stagnate over the past 3 years and the company is looking for a way to reignite excitement in the market for motorcycles. The company has notices that there is a growing trend in the market for 3-wheel version of the touring bike, particularly with people looking for an "easier" bike to ride. 2 Years ago, the company began a market study to learn more about these consumer desires, which was completed a year later The company learned that Polaris Industries, one of their competitors, makes 3 wheel bikes, with alternative designs that have a growing base of interest with people looking to get into the market for the first time. Based on that study, the company took the next step and designed a new 3-wheeler and built 10 prototypes the world show potential customers around The company is now in the process of making the "go", "no-go" decision on this potential new product. Your task as a financial analyst is to crunch the numbers and make a recommendation to senior management about the economic viability of this potential new product. Important Facts: The company spent $1.5 million on market research studies designed to identify market opportunities The company spent $14 million on engineering to design and build prototypes of the potential new product The company sees education and promotion as a critical component of success. If they move ahead, the company plans to run an advertising campaign to educate the public about their new product, which they think will cost $1 million a year Market research suggests that the company could sell 5,000 units the first year, 10,000 the second and 12,500 units per year for years 3 to 10. Sales after that date are more uncertain. The company currently sells 25,000 traditional 2-wheel versions of its touring bike a year for $2,250 a unit. Its cost of production is $1,000. The company believes the new product will cannibalize existing bike to the tune of about 1,000 units in year 1, 2,000 units in year 2 and 3,000 in the following years The company expects to sell the trike for $2,500 a unit and the direct cash cost of production is $1,300. The company will assign a team of 15 managers to manage the product, brand, support sales and address any challenges that may arise over time. The team is expected to cost $2,000,000 a year The corporate income tax rate or Federal, State and local taxes is 25% The company uses straight-line depreciation to expense it plant and equipment. The company will use an existing manufacturing facility, which has an appraised value of $10,000,000. The land is worth $4,000,000 and the building is worth $6,000,000. It originally has an expected life of 30 years and the building is 10 years old. The building is expected to have a residual value of $500,000. The company will have to purchase customized machinery to manufacture the trikes, which they expect will cost $12,000,000. The machinery has an expected life of 20 It is expected to have $5,000,000 of residual value after 10 years and, years $1,000,000 of residual value after 20 years will sell its products to retailers at wholesale who will pay them The company within 30 days of receiving their product The company will need to carry raw material and finished goods inventory that amounts to about 15% of the expected following years expected direct cost of production Compute the NPV of the project using 20% as the discount rate. Compute the IRR of the cash flows. Should the company pursue the project? CASE DESCRIPTION Mike's Motor Cycles is a premier manufacturer of motorcycles, which they sell around the world. Their products are broken down into the following segments with the number of versions indicated Off-road Street Touring 3-Wheeler The company has seen sales stagnate over the past 3 years and the company is looking for a way to reignite excitement in the market for motorcycles. The company has notices that there is a growing trend in the market for 3-wheel version of the touring bike, particularly with people looking for an "easier" bike to ride. 2 Years ago, the company began a market study to learn more about these consumer desires, which was completed a year later The company learned that Polaris Industries, one of their competitors, makes 3 wheel bikes, with alternative designs that have a growing base of interest with people looking to get into the market for the first time. Based on that study, the company took the next step and designed a new 3-wheeler and built 10 prototypes the world show potential customers around The company is now in the process of making the "go", "no-go" decision on this potential new product. Your task as a financial analyst is to crunch the numbers and make a recommendation to senior management about the economic viability of this potential new product. Important Facts: The company spent $1.5 million on market research studies designed to identify market opportunities The company spent $14 million on engineering to design and build prototypes of the potential new product The company sees education and promotion as a critical component of success. If they move ahead, the company plans to run an advertising campaign to educate the public about their new product, which they think will cost $1 million a year Market research suggests that the company could sell 5,000 units the first year, 10,000 the second and 12,500 units per year for years 3 to 10. Sales after that date are more uncertain. The company currently sells 25,000 traditional 2-wheel versions of its touring bike a year for $2,250 a unit. Its cost of production is $1,000. The company believes the new product will cannibalize existing bike to the tune of about 1,000 units in year 1, 2,000 units in year 2 and 3,000 in the following years The company expects to sell the trike for $2,500 a unit and the direct cash cost of production is $1,300. The company will assign a team of 15 managers to manage the product, brand, support sales and address any challenges that may arise over time. The team is expected to cost $2,000,000 a year The corporate income tax rate or Federal, State and local taxes is 25% The company uses straight-line depreciation to expense it plant and equipment. The company will use an existing manufacturing facility, which has an appraised value of $10,000,000. The land is worth $4,000,000 and the building is worth $6,000,000. It originally has an expected life of 30 years and the building is 10 years old. The building is expected to have a residual value of $500,000. The company will have to purchase customized machinery to manufacture the trikes, which they expect will cost $12,000,000. The machinery has an expected life of 20 It is expected to have $5,000,000 of residual value after 10 years and, years $1,000,000 of residual value after 20 years will sell its products to retailers at wholesale who will pay them The company within 30 days of receiving their product The company will need to carry raw material and finished goods inventory that amounts to about 15% of the expected following years expected direct cost of production Compute the NPV of the project using 20% as the discount rate. Compute the IRR of the cash flows. Should the company pursue the project