Exhibit 2-2 a Small Sporting Goods Company Is Considering Investing $2000 in $2000

question 5

Essay

Exhibit 2-2
A small sporting goods company is considering investing $2000 in a project at the start of year 1 that will produce volleyballs over the next five years. The company plans to produce and sell 200 volleyballs in the first year, and expects that volume to grow by 10% each year thereafter. The unit selling price forecast the company has developed is $20 in year 1, $22 in year 2, $25 in year 3, $28 in year 4, and $31.50 in year 5. Variable costs are forecast to be $15 per unit produced, and there will be a fixed overhead cost in each year of $500.  (Unless otherwise indicated, assume that all cash flows occur at the end of the year.)
-Refer to Exhibit 2-2.Suppose instead that the company thinks it can reduce its variable cost rate.What rate would produce an NPV of $10,000

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Definitions:

Linear Programming

A mathematical modeling technique used for optimization of a linear objective function, subject to linear equality and inequality constraints.

Sensitivity Analysis

A technique used to determine how different values of an independent variable will impact a particular dependent variable under a given set of assumptions.

Linear Programming

A mathematical method used for achieving the best outcome (such as maximum profit or lowest cost) in a mathematical model whose requirements are represented by linear relationships.

Corner Points

In linear programming, points at the corner or edge of the feasible region which may contain the optimal solution.