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The Executive Committee of Reder Electric Vehicles is debating whether to replace its original model, the REV-Touring, with a new model, the REV-Sport, which would

  • The Executive Committee of Reder Electric Vehicles is debating whether to replace its original model, the REV-Touring, with a new model, the REV-Sport, which would appeal to a younger audience. Whatever vehicle chosen will be produced for the next 4 years, after which time a reevaluation will be necessary. The REV-Sport has passed through the concept and initial design phases and is ready for final design and manufacturing. Final development costs are estimated to be $75 million, and the new fixed costs for tooling and manufacturing are estimated to be $600 million. The REV-Sport is expected to sell for $30,000. The first year sales for the REV-Sport is estimated to be 60,000, with a sales growth for the subsequent years of 6% per year. The variable cost per vehicle is uncertain until the design and supply-chain decisions are finalized, but is estimated to be $22,000. Next-year sales for the REV-Touring are estimated to be 50,000, but the sales are expected to decrease at a rate of 10% for each of the next 3 years. The selling price is $28,000. Variable costs per vehicle are $21,000. Since the model has been in production, the fixed costs for development have already been recovered. Develop a 4-year model to recommend the best decision using a net present value discount rate of 5%. How sensitive is the result to the result to the estimated variable cost of the REV-Sport? How might this affect the decision?

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