NPV question

Hugi13

Any good management accountant around ? Question to solve. My calculations give me cash flows of year 0= -200k, year 1=-530k, year 2 =-20k, year 3 =370k.
Am I missing something ?

Company X: Finance Assignment

Your company is considering the launch of a new convenience food product. The product is based on recipes developed by top chefs, and is designed to help convert simple home cooking into delicious gourmet standard meals. The food is aimed initially at the Irish market, but have been developed with a view to entering the UK markets in year 2 and building further into that market in year 3.
You have been given some information about the basic parameters of the product proposed, and you have been asked to prepare a high-level feasibility assessment.

Pricing, retail and distributor discount assumptions

The initial indications from market research suggest that the product can sell at a retail price of €4 per unit. Retailer discount will be an average of 40%. Initial indications suggest that a distributor can offer services for delivery of product to retailer, basic merchandising and order taking and other services which require frequent store visits, charging a total % fee of 10% of retail price.

Market research: Potential product demand

Sales volumes at €4 per unit would be:
2016: 300,000
2017: 500,000
2018: 1,000,000
Sales volumes at €3.20 per unit would be:
2016: 400,000
2017: 700,000
2018: 1,500,000

Overhead Costs required

The estimated overheads required to drive the project have been estimated and summarized for you as:
Annual Salary costs: 280,000, reflecting one product manager and 2 sales and marketing executives
Marketing Costs for promotion, advertising trade fairs:
2016: €80,000
2017: €90,000
2018: €100,000
Administration costs: €50,000 per annum

Direct Product costs and Investment Required

The product is still at the prototype stage but costings so far suggest a per unit cost including materials, utilities, packaging and direct labour of €1.20. This assumes the product is manufactured in house using spare capacity in the existing manufacturing facilities. New equipment costing €200,000 would be needed to manufacture and package the product.



Please prepare a short report (Approx 3 pages in total)

a) Lay out the overall financial implications of the proposal based on the above information, including a profit and loss forecast for the company for the next 3 years, as well as a cashflow forecast recognizing the upfront investment, that retail customers will require 3 months credit, and that a stock buffer of €50,000 will be needed from the beginning of the project.

b) Assess the viability of the product based on the above information. Comment on the overall attractiveness of the product from a financial perspective

c) Make a recommendation on the price point between the alternatives outlined above, including a summary of the advantages and disadvantages of the alternative price points.