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.) Suppose instead that the company thinks it can reduce its variable cost rate. What rate would produce an NPV of $10,000?
Using Excel's Goal Seek function, the required variable cost rate would be $10.02 per unit of production.
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Fill in the blank(s) with the appropriate word(s).
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What will be an ideal response?