VidMark, a manufacturer of cellphones, is developing a new model (VidPhone X70) that will be released on the market when development is complete. This phone will be revolutionary in that it will allow the user to place group video phone calls. VidMark is concerned about the development cost and time. They are also worried about market estimates of the sales of the new VidPhone X70. The cost estimates and forecast are given in the table below:

Development Cost Development Time Ramp-up Cost Marketing and Support Cost Unit Production Cost Unit Price Sales and Production Volume Year 3 Year 4 Year 5

2,000,000,2 years, $ 750,000, $ 500,000/year, $ 75, $ 135

40,000

50,000

40,000

Use the data above to develop a base case analysis. The project schedule is shown below with timings of the cash flows.

Year

VidPhone X70 Schedule Development Ramp-up Marketing & support Production and sales

a. What are the yearly cash flows and their present value (PV, discounted at 12%) of this project? What is the net present value (NPV)?

b. What is the impact on VidMark if their sales estimates are off by 20%?

c. What is the impact on VidMark if their unit production cost is $85?

Question. a ($ values in thousands)

Year

1

2

3

4

5

Development cost Ramp-up cost Marketing & support cost Production volume Unit production cost
Production cost
Sales volume Unit price
Sales revenue
Period cash flow
PV Year 1, r = 12%
Project NPV

Question. b ($ values in thousands)

1

2

Year 3

4

5

Development cost Ramp-up cost Marketing & support cost Production volume Unit production cost
Production cost
Sales volume Unit price
Sales revenue
Period cash flow
PV Year 1, r = 12%
Project NPV

Question. c ($ values in thousands)

1

2

Year 3

4

5

Development cost Ramp-up cost Marketing & support cost Production volume Unit production cost
Production cost
Sales volume Unit price
Sales revenue
Period cash flow
PV Year 1, r = 12%
Project NPV