The Executive Committee of Reder Electric Vehicles is debating whether to replace its original model, the REV Touring, with a new model, the REV Sport, which would appeal to a younger audience. Whatever vehicle chosen will be produced for the next 4 years, after which time a reevaluation will be necessary. The REV Sport has passed through the concept and initial design phases and is ready for final design and manufacturing. Final development costs are estimated to be $ 75 million, and the new fixed costs for tooling and manufacturing are estimated to be $ 600 million. The REV Sport is expected to sell for $ 30,000. The first year sales for the REV Sport is estimated to be 60,000, with a sales growth for the subsequent years of 6% per year. The variable cost per vehicle is uncertain until the design and supply chain decisions are finalized, but is estimated to be $ 22,000. Next year sales for the REV Touring are estimated to be 50,000, but the sales are expected to decrease at a rate of 10% for each of the next 3 years. The selling price is $ 28,000. Variable costs per vehicle are $ 21,000. Since the model has been in production, the fixed costs for development have already been recovered. Develop a 4 year model to recommend the best decision using a net present value discount rate of 5%. How sensitive is the result to the estimated variable cost of the REV-Sport? How might this affect the decision?
This question was answered on: Jul 11, 2017
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