INSTITUT TEKNOLOGI BANDUNGSCHOOL OF BUSINESS AND MANAGEMENTUNDERGRADUATE STUDY PROGRAM IN MANAGEMENT

MB4028OPERATIONS EXCELLENCE STRATEGY

Home WorkBase-Case Financial Model

By: Shanni Ardhana Herputra | 12208024

Semester I, 2011/2012

October 2011

1. The Tuff Wheels has new product called Kiddy Dozer. Tuff Wheels has forecasted the demand and the cost to develop and produce the new Kiddy Dozer. The table below contains the relevant information for this project.

Development Cost $ 1,000,000Estimated Development Time 9 monthsPilot Testing $ 200,000Ramp-up Cost $ 400,000Marketing and Support Cost $ 150,000 per yearSales and production Volume 60,000 per yearUnit production Cost $ 100Unit Price $170Interest Rate 8%

Tuff Wheels also has provided the project plan shown below. As can be seen in the project plan, the company thinks that the product life will be three years until a new product must be created.

Project Schedule Year 1 Year 2 Year 3 Year 4

Kiddy Dozer Q1 Q2Q3 Q4 Q1

Q2 Q3 Q4

Q1 Q2 Q3

Q4 Q1 Q2

Q3 Q4

DevelopmentPilot TestingRamp-upMarketing and SupportProduction and Sales

Questions:a. What are the yearly cash flows and their present value (discounted at 8%) of this

project? What is the net present value? b. What is the impact on NPV for the Kiddy Dozer if the actual sales are 50,000 per year

or 70,000 per year? c. What is the effect caused by changing the discount rate to 9%, 10%, or 11%

I used the Microsoft Offices Excel to calculation. Some results will be attached behind.

Answers:a. The NPV, yearly cash flows and their yearly present value (discounted at 8%):

b.b.b.b.b.b.

The impact of NPV if actual sales changed to:Actual Sales (unit) NPV ($)

50,000 6,626,57070,000 10,046,063

c. The effect caused by changing the discount rate:

Discount rate

PV ($)NPV ($)

Year 1 Year 2 Year 3 Year 49% 1,546,020 3,505,725 3,207,189 2,934,076 8,100,970

10% 1,536,346 3,450,765 3,126,223 2,832,204 7,872,84511% 1,526,765 3,396,823 3,047,513 2,734,124 7,651,694

2. Perot Corporation is developing a new CPU chip called Patay2 chip. It will have a market life of two years after it is introduced. Perot expects to be able to price the chip higher in the first year, and it anticipates a significant production cost reduction after the first year as well. The relevant information for developing and selling the Patay2 is given in table below.

Development Cost $20,000,000Pilot Testing $5,000,000Debug $3,000,000Ramp-up Cost $3,000,000Advance Marketing $5,000,000Marketing and Support Cost $1,000,000 per yearUnit Production Cost Year 1 $655Unit Production Cost Year 2 $545Unit Price Year 1 $820Unit Price Year 2 $650Sales and Production Volume Year 1 250,000

Year 1 Year 2 Year 3 Year 4

Yearly cash flow ($) -1,637,500 4,050,000 4,050,000 4,050,000Yearly present value ($)

-1,555,790 3,561,720 3,290,480 3,039,900

NPV ($) 8,336,320

Sales and Production Volume Year 2 150,000Interest Rate 10%

Project Schedule Year 1 Year 2 Year 3 Year 4

Patay2 Chip 1st half

2nd half

1st half

2nd half

1st half

2nd half

1st half

2nd half

Development Pilot Testing Debug Ramp-up Advance Marketing Marketing and Support Production and Sales

Questions:a. What are the yearly cash flows and their present value (discounted at 10%) of

this project? What is the net present value?b. Perot’s engineers have that spending $10 million more on development will

allow them to add even more advanced features. Having a more advanced chip will allow them to price the chip $50 higher in both years ($870 for year 1 and $700 for year 2). Is it worth the additional investment?

c. If sales are only 200,000 the first year and 100,000 the second year, would Perot still do the project?

Answers:a. The NPV, yearly cash flows and their yearly present value (discounted at 10%):

b. Development cost added $10 million to be $30 million then price of the chip increased to $50 higher in both years ($870 for year 1 and $700 for year 2).

If

we compare the value of NPV from point b. and point a. that we can see that NPV from point b. is higher than NPV point from point a. so it is worth it to spending $10 million more on development.

Year 1 Year 2 Year 3 Year 4

Yearly cash flow ($) -10,000,000 -26,000,000 40,250,000 14,750,000Yearly present value ($)

-9,297,052 -21,760,480 30,786,049 10,232,965

NPV ($) 9,961,481

Year 1 Year 2 Year 3 Year 4

Yearly cash flow ($) -15,000,000 -31,000,000 52,750,000 22,250,000Yearly present value ($)

-13,945,578 -25,976,831 40,346,934 15,436,168

NPV ($) 15,860,693

c. The effect caused by changing sales unit to 200,000 units on first year and 100,000 the second year:

We can see that if sales unit changed into 200,000 on the first year and 100,000 the second year will change NPV value to $9,056. This value is so far lower than the NPV value when sales unit 250,000 the first year and 150,000 the second year. With NPV $9,056 Perot’s project still can running because it’s still attracted but less attracted than when the sales unit not changed (when sales are 250,000 the first year and 150,000 the second year).

Year 1 Year 2 Year 3 Year 4

Yearly cash flow ($) -10,000,000 -26,000,000 32,000,000 9,500,000Yearly present value ($)

-9,297,052 -21,760,481 24,475,865 6,590,723

NPV ($) 9,056