The TitMar Motor Company is considering the production of a new personal transportation vehicle that would be called the PTV would compete directly with the innovative new Segway. The PTV will utilize a three-wheel platform capable of carrying one rider for up to six hours per battery charge, thanks to a new battery system developed by TitMar. TitMar's PTV will sell for substantially less than the Segway but will offer equivalent features. The pro forma financials for the proposed PTV project including the forecasts and assumptions that underlie them, are set out in Exhibit P3-4.1. Note that revenue is calculated as follows: price per unit *market value (%)*market size and units sold=revenue/price per unit. The project offers an unexpected NPV of $9,526,209 and an IRR of 39.82%. Given TitMar's stated hurdle rate of 18%, the project looks like a winner. Even though the project looks very good based on management's estimates, it is risky and can turn from positive-NPV investment to a negative one with relatively modest changes in the key value drivers. Develop a spreadsheet model of the project valuation and answer the following questions. a. If the firm's market share turns out to be only 5%, what happens to the project's NPV and IRR? b. If the market share remains at 15% and the price of the PTV falls to $4,500, what is the resulting NPV?

PROBLEM 3-4: TitMar Motor Company Given Assumptions and Predictions Price per unit Market share (%) Market size (Year 1) Growth rate in market size beginning in Year 2 Unit variable cost Fixed cost Tax rate Cost of capital Investment in NWC Initial investment in PP&E Depreciation (5 year life wo salvage) Solution Legend Estimates $4,895 15.00% $200,000 5.00% $4,250 $9,000,000 50.00% 18.00% = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output Part a. Substitute 5% for market share (%) . Part b. Substitute $4,500 for the price per unit. of the predicted change in firm 5.00% revenues. $7,000,000 $1,400,000 Solution Year Investment Revenue Variable Cost Fixed cost Depreciation EBT(Net Operating Income) Tax Net Operating Profit after Tax (NOPAT) Plus: Depreciation expense Less: Capex Less: Change in NWC Free Cash Flow Net Present Value Internal Rate of Return 0 $(7,000,000) 1 2 5 161,902,125 (140,568,750) (9,000,000) (1,400,000) $10,933,375 (5,466,688) $5,466,688 1,400,000 (404,755) $6,461,932 169,997,231 (147,597,188) (9,000,000) (1,400,000) $12,000,044 (6,000,022) $6,000,022 1,400,000 (424,993) $6,975,029 178,497,093 (154,977,047) (9,000,000) (1,400,000) $13,120,046 (6,560,023) $6,560,023 1,400,000 8,924,855 $16,884,878 31,500 33,075 34,729 36,465 $9,526,209 39.82% a. If the market share is only 5% then the project's NPV = b. If market share = 15% and the price of the PTV falls to $4,500 the NPV = Analysis: 4 154,192,500 (133,875,000) (9,000,000) (1,400,000) $9,917,500 (4,958,750) $4,958,750 1,400,000 (385,481) $5,973,269 30,000 (7,000,000) (7,342,500) $(14,342,500) Units Sold Breakeven Sensitivity Analysis Price per unit Market share (%) Market size (Year 1) Growth rate in market size beginning in Year 2 Unit variable cost Fixed cost Tax rate Cost of capital Investment in NWC 3 146,850,000 (127,500,000) (9,000,000) (1,400,000) $8,950,000 (4,475,000) $4,475,000 1,400,000 (367,125) $5,507,875 Critical % Change Critical Value