Mars Incorporated is interested in going to market with a new fuel savings device that attaches to electrically powered industrial vehicles. The device, code named “Python,” promises to save up to 15 percent of the electrical power required to operate the average electric forklift. Mars expects that modest demand expected during the introductory year will be followed by a steady increase in demand in subsequent years. The extent of this increase in demand will be based on customer’s expectations regarding the future cost of electricity and which is shown in the Table. Mars expects to sell the device for $500 each, and does not expect to be able to raise its price over the foreseeable future. Demand for Python Power Saving Device Expected Demand of the Device in Units/Year Year Small Increases in theCost of Electrical Power Large Increases in theCost of Electrical Power 1 2 3 4 5 1000 5000 1000 15000 18000 10000 8000 15000 20000 30000 Mars is faced with two alternatives:▪ Alternative 1: Make the device themselves, which requires an initial outlay of $250,000 in plant and equipment and a variable cost of $75 per unit.▪ Alternative 2: Outsource the production, which requires no initial investment, but incurs a per unit cost of $300.a. Assuming small increases in the cost of electrical power, compute the cash flows for each alternative. Over the next five years, which alternative maximizes the NPV of this project if the discount rate is 10 percent?b. Assuming large increases in the cost of electrical power, compute the cash flows for each alternative. Over the next five years, which alternative maximizes the NPV of this project if the discount rate is 10 percent?
Mars Incorporated is interested in going to market with a new fuel savings device that attaches to electrically powered industrial vehicles. The device, code named “Python,” promises to save up to 15 percent of the electrical power required to operate the average electric forklift. Mars expects that modest demand expected during the introductory year will be followed by a steady increase in demand in subsequent years. The extent of this increase in demand will be based on customer’s expectations regarding the future cost of electricity and which is shown in the Table. Mars expects to sell the device for $500 each, and does not expect to be able to raise its price over the foreseeable future.
| Demand for Python Power Saving Device | ||
| Expected Demand of the Device in Units/Year | ||
| Year | Small Increases in the Cost of Electrical Power |
Large Increases in the Cost of Electrical Power |
|
1 2 3 4 5 |
1000 5000 1000 15000 18000 |
10000 8000 15000 20000 30000 |
Mars is faced with two alternatives:
▪ Alternative 1: Make the device themselves, which requires an initial outlay of $250,000 in plant and equipment and a variable cost of $75 per unit.
▪ Alternative 2: Outsource the production, which requires no initial investment, but incurs a per unit cost of $300.
a. Assuming small increases in the cost of electrical power, compute the
b. Assuming large increases in the cost of electrical power, compute the cash flows for each alternative. Over the next five years, which alternative maximizes the NPV of this project if the discount rate is 10 percent?
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