(BRAND)
By the end of its first year of operations, (tac) expects to see this investment begin to return a profit with revenues of $245,322.
By this time, additional revenue can be expected, but is not reflected here, from advertising through community building.
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(tac) will operate with an average unit cost of $23.63 for the first two years, followed by an average unit cost of $24.09 in years two through five as result of expanding its product line.
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This cost is calculated using the average cost of goods that considers manufacturing, labor and distribution costs. A break-down of this calculation is depicted in the below table.
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Based on an initial investment of $217,556, (tac) can generate an NPV of $320,339 with an IRR of 39 percent.
With an acquisition cost based on sales and marketing costs, (tac) can maintain an average SG&A costs of 34 percent, allowing (tac) to generate strong profits.
It is important to note that certain costs, such as those associated with labor and maintenance, are variable costs that increase incrementally based on the expected growth of the organization. For example, (tac) expects to employ one junior design specialist by the end of its fifth year, as a result the expected cost of salaries for product managers will be equal to the total of the six salaries for that year plus the total for the number of associates employed times the salary cost for each preceding year.
Lower sales than anticipated
Even in the case that (tac) misses its anticipated annual sales goals by 30 percent, the organization could still generate a positive NPV of $118,716 with an IRR of 22 percent by the end of a five-year period. The yearly profits for this scenario are depicted below:
Underestimated SG&A costs
In the event that (tac) has underestimated the percentage of SG&A costs (34 percent), (tac) could still achieve a positive NPV at the end of a five-year period as long as the SG&A percentage remains under 44 percent of its gross revenue. This means that, holding all other variables fixed, the annual average SG&A costs of $367,204 could increase to $475,206 to generate an NPV of $58,158 with an IRR of 16 percent at the end of the five-year period. The yearly profits for this scenario are depicted below:
Underestimated unit costs
(tac)’s average unit cost ($23.63 for the first two years and $24.09 for years two through five) could increase by 5 percent to $24.81 and $25.39 (respectively) per unit before the threat of a negative NPV is realized. Holding all other variables fixed, (tac) could still generate an NPV of $3,160 with an IRR of 35 percent at the end of the five-year period. The yearly profits for this scenario are depicted below:
