Question

It is January 1 2020 and you have recently started a new company, Green- Drone, that produces flying drones for garden maintenance. You are still at the product development stage but would like to evaluate the financial feasibility of the project. Here are some information about the company:

• - R&D expenditures. In order to develop the drones, you need to hire an engineer for 5 years at an annual salary of $96,000. The salary is paid monthly at the end of the month in equal amounts, i.e. 96,000/12 per month for the first year. To stay competitive, you expect you will have to grow the annual salary at a rate of 3%, starting the next year. The engineer contract starts today, i.e., on January 1 2020.

• - Production cost. Once the product is developed in 5 years (Jan- uary 1 2025), you will start the production of your drones. Each product is expected to cost $265 to produce. The cost is to be paid to the supplier at the beginning of a month.

• - Pricing and sales. You plan to sell the drones for $325 a unit over the next three years, i.e., until January 1 2028. All sales for products produced in a month are collected at the end of the month.

  The appropriate discount rate r is 5%, annually compounded. Denoting the quantity of drones sold in a month by Q. How many drones do you need to sell per month to make this project profitable (i.e., generate a positive NPV)?

Answer 1