X Toys is considering producing and selling a new line of self-driving toy trucks. X projects the first year volume to be 3,000 units, increasing by 500 units per year for 3 years, then decreasing by 300 units for the next 2 years as the market achieves a stable equilibrium. The contribution margin is expected to be $50 per unit. The cost of the production facility is $450,000, payable up front. X will use straight-line depreciation to spread the cost of the facility over its 5-year useful life. Advertising will be $70,000 during the first year, and $50,000 for each of the next 4 years. The costs of operating the facility will be $15,000 per year for the first 3 years, then increase to $20,000 for the last 2 years. Unless otherwise stated, annual costs are spread evenly throughout the year. The expected cost of capital (CoC) is 6%.

The President, Sally Mander, wants you to present your analysis for the first 5 years to the Board of Directors as part of the process of deciding whether X should launch the new product. Answer the questions below..

What is the NPV of the new product at the expected CoC?

ANSWER:

32. What is the NPV of the new product if the CoC drops to 5.0%?

ANSWER:

33. If the CoC is 5.0%, what is the Payback Period?

ANSWER: