You are in-charge of launching 2 BRAND-NEW handbags for the upcoming season.

The bags are:

1. New Wave Chain Bag: Sales price per item = $2,880

Cost of Goods Sold (CoGS): 45%

Initial Production Set-Up Cost: $0 (Uses same production set-up as previous years model)

3-Year Ad Schedule: 1) $5,000,000, 2) 25% less than prior year, 3) 25% less than prior year

Expected 3-Year Sales (in units): 1) 60,000, 2) 0.01 units for each $1 in advertising spent in the prior year, 3) 0.01 units for each $1 in advertising spent in the prior year.

2. Bleeker Box: Sales price per item = $3,150

Cost of Goods Sold (CoGS): 55%

Initial Production Set-Up Cost: $10,000,000

3-Year Ad Schedule: 1) $10,000,000, 2) 25% less than prior year, 3) 25% less than prior year

Expected 3-Year Sales (in units): 1) 100,000, 2) 0.0075 units for each $1 in advertising spent in the prior year, 3) 0.0025 units for each $1 in advertising spent in the prior year.

QUESTION:

Use a 3-year time frame and a 12% cost of capital for the NPV.

Rank the handbags based on ROI, 1^st and 2^nd.

Assuming Initial Production Set-Up Cost and Advertising Expense are Fixed Costs, calculate the First-Year Break-Even for each handbag in UNITS and $ DOLLARS.