Regina Industries has a new product whose sales are expected to be 1.2, 3.5, 7, 5, and 3 million units per year over the next 5 years. Production, distribution, and overhead costs decline 10% per year from $140 per unit in the first year. The price will be $200 per unit for the first 2 years and

Question

Regina Industries has a new product whose sales are expected to be 1.2, 3.5, 7, 5, and 3 million units per year over the next 5 years. Production, distribution, and overhead costs decline 10% per year from $140 per unit in the first year. The price will be $200 per unit for the first 2 years and then $180, $160, and $140 for the next 3 years. The remaining R&D and production costs are $300 million. If i is 15%, what is the present worth of the new product?

Accepted Answer

All of the variable values are entered in the spreadsheet’s data block, except for the yearly volume. Since each year is different, these values are simply entered into column B. Note that the gradient for revenue per unit first makes a difference in Year 3.

G	F	E	D	C	B	A
					First cost($M)	$300	1
				Initial unit cost		$140	2
			Geomrtric gradient for cost			-10%	3
				Initial unit revenue		$200	4
		Arithmetic change in unit revenue for years 3 to 5				-$20	5
					Interest	15%	6
	Cash flow	Net revenue unit	Cost unit	Revenue unit	Volume(M)	Year	7
=-$A$1	-$300.0					0	8
	72.0	$60	$140	$200	1.2	1	9
=B10*E10	259.0	74	126	200	3.5	2	10
	466.2	67	113	180	7.0	3	11
	289.7	58	102	160	5.0	4	12
	144.4	48	92	140	3.0	5	13
							14
	$502	PW($M)	=D12*(1+$A$3)				15
=F8+NPV($A$6,F9:F13)					=C12+$A$5		16

With a present worth of over $500M, this is a desirable project.

Example 5–13 uses the XNPV spreadsheet function, which finds the present worth of a series of cash flows that occur on specific dates. The NPV function assumes that time 0 is one period before the first cash flow, so time 0 must not be included in the function’s range. XNPV is different. Time 0 must be specified just like every other date—even if there is no cash flow at time 0. The time 0 date specifies the when for the net present value or present worth. The interest rate for the XNPV function is an effective annual rate, and XNPV is using calendar dates, so leap year has an extra day and the daily interest rate is slightly smaller in leap years.

Question 5.12: Regina Industries has a new product whose sales are expected...

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