below is two questions that i need help with Two questions in attached document: 1 is NPV and the other is contribution per unitadmin / August 17, 2018
This year, your company plans to spend $6 million on HPRA advertising in North America and $7.5 million on EPRA advertising in North America, which…
below is two questions that i need help with Two questions in attached document: 1 is NPV and the other is contribution per unit
This year, your company plans to spend $6 million on HPRA adver±sing in North
America and $7.5 million on EPRA adver±sing in North America, which is the only
market region where you are currently selling. You plan to invest $4 million on
R&D for the HPRA, $5 million on R&D for the EPRA, and $8 million on R&D for
You are also inves±ng $9 million in process improvement. Your pro forma income
statement shows a projec±on for sales oFce and sales reps expenses of $5.5
million. Shipping and warehouse expenses are projected to be $11.5 million and
administra±on expense are projected at $4 million.
Your cost per unit available is $49.20 for HPRA and $77.40 for EPRA. You are
forecas±ng sales of 2,139,000 units for HPRA and 713,000 units for EPRA. You will
sell your HPRA for $73 per unit and your EPRA for $105 per unit.
What is the contribu±on per unit (in dollars) for each HPRA and each EPRA that
One of your sales representa±ves has the opportunity to land a big customer
who wants to sign a long-term deal with you. They will buy 50,000 units of HPRA
immediately (year 0) and 50,000 more units for each of the next ²ve years (so
the total sales volume will be 300,000 units over the ²ve-year life of the deal). In
addi±on, the customer is willing to pay a premium for these products, so you will
be able to increase your price per unit by 8% each year. Your task is to conduct an
analysis of this opportunity to determine the Net Present Value of this deal.
In addi±on to the informa±on given above, here are some numbers you can use
for your analysis:
Your current (year 0) price for HPRA is $67 per unit.
Your current adver±sing budget for HPRA is $5 million per year and you can
assume that this will increase by 20% each year.
The incremental a³er-tax contribu±on margin on HPRA is currently $6 per unit,
and you can assume that the contribu±on margin will increase by 8% for each of
the next ²ve years.
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Your current producTon capacity is 1.44 million units per shif, and you can
assume that you will not need to add producTon capacity during the next Fve
Your current select rate is 88% and you can assume that it will decrease by 2%
per year without investment in Process Improvement.
Your weighted average cost o± capital is 15%.
What is the Net Present Value o± this deal?