A motor manufacturer is to develop a new car model to be produced from 1 January
2002 for six years until 31 December 2007. The development cost will be $33 million,
of which $18 million will be incurred on 1 January 2000, $10 million on 1 July 2000
and $5 million on 1 January 2001
The production cost of each car is assumed to be incurred at the beginning of the
calender year of production and will be $9,000 during 2002. The sale price of each
car is assumed to be received at the end of the calender year of production. Both the
production costs and the sale prices are assumed to increase by 5% each 1 January,
the first increase occurring in 1 January 2003. It is also assumed that 5,000 cars
will be produced each year and that all will be sold. The sale price of each car
produced in 2002 is $12,100.
Calculate the discounted payback period at an effective rate of interest of 9%
per annum
Without doing any further calculations, explain whether the discounted payback period would be greater than, equal to, or less than the period calculated
in (a) if the effective rate of interest were substantially less than 9% per annum
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