Reference no: EM132205607

You have founded a company to sell thin client computers to the food processing industry for Internet transaction processing. Before investing in your new company, a venture capitalist has asked for a five-year pro-forma income statement showing unit sales, revenue, total variable cost, marketing expense, fixed cost, and profit before tax. You expect to sell 1600 units of the thin client computers in the first year for $1800 each. You expect to double unit sales each year for the next five years. However, competition will force a 15% decline in price each year. Fortunately, technical progress allows initial variable manufacturing costs of $1000 for each unit to decline by 6% per year. Fixed costs are estimated to be $1,000,000 per year. Marketing expense is projected to be 14% of annual revenue. When it becomes profitable to do so, you will lease an automated assembly machine that reduces variable manufacturing costs by 20% but doubles the annual fixed cost; the new variable manufacturing cost will also decline by 6% per year. Net present value (NPV) will be used to aggregate the stream of annual profits, discounted at 15% per year.

a) Ignoring tax considerations, build a spreadsheet for the venture capitalist.

b) How many units do you need to sell in the first year to break even in the first year? (Bonus question)

c) How many units do you need to sell in the first year to break even in the second year? (Bonus question)

Hint: To determine the total manufacturing cost for each year, you need to take the minimum between the cost under regular operation and the cost under lease. The rest is similar to what we did in the class. To do the break-even analysis, you may need to use Data Table or Goal Seek function in Excel.