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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. Fixed development costs are estimated to be $80 million, and the new fixed costs for tooling and manufacturing are estimated to be $580,000. The REV-Sport is expected to sell for $32,000. The first year sales for the REV-Sport is estimated to be 62,500, with a sales growth for the subsequent years of 6% per year. The variable cost per vehicle is uncertain unti the design and supply chain decisions are finalized, but is estimated to be $23,000. Next-year sales for the REV-Touring are estimated to be 52,500, but the sales are expected to decrease at a rate of 10% for each of the next 3 years. The selling price is $30,000. Variable cost per vehicle are $22,000. 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%.

Reder Electric Vehicles

REV-Sport

REV-Touring

Selling Price

$32,000

Selling Price

$30,000

First Year Sales

62,500

First Year Sales

52,500

Variable Cost

$23,000

Variable Cost

$22,000

Fixed Development Cost

$80,000,000

Sales Volume Shrink Rate

10%

Fixed Tooling and Manufacturing Cost

$580,000

Sales Volume Growth Rate

6%

Financial Analysis

Financial Analysis

Year 1

Year 2

Year 3

Year 4

Year 1

Year 2

Year 3

Year 4

Annual Sales

62500

Annual Sales

Revenue

$2,000,000,000

Revenue

Total Variable Cost

32000

Total Variable Cost

Net Profit

Net Profit

Net Present Value

Net Present Value

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