Shambles, a large toy retailer, is looking at bringing out a latest range of soft toys. The range under consideration is “Mythical Beasts.”  The “Mythical Beasts” range will cost £50,000 to setup and has running costs of £12,000 per year after which for five years.

The predicted return from this range is:

Year    2012    2013    2014    2015    2016
£    24,000    28,000    32,000    36,000    40,000

(a) Suppose a discount rate of 10%. Use Excel to set up a discounted cash flow analysis of the above information, calculating the net present value (or NPV) for the investment. Remember that the initial expenditure takes place in 2011.                           
Your spreadsheet should be constructed in such a manner that it can accommodate various values of the discount rate, and should be as well-organized as possible. This means that formulae and fixed cell-referencing must be used where appropriate.  Also, the entire analysis must be contained in a single table.  Include a print-out of cell values as well as a print-out of cell formulae.

(i) From the information in the spreadsheet only, decide whether or not this is a worthwhile investment, giving your reasons.                            
(ii) Elucidate the effect of discounting in this case upon prospect inflows, outflows and the NPV.

(b) Compute the NPV for discount rates of 20%, 30%, 40% and 50%, giving your answers to two decimal places.                                       
(c) Using Excel and the data generated from part (b), plot NPV against the discount rate in the range 10% to 50%.
(Your graph must be labelled clearly.)

(d) Employ your graph to estimate the discount rate which would give a NPV of zero.  What is the importance of this discount rate? (Hint:

What happens at discount rates lower and higher than this figure?)

The Linear Programming (Optimisation) Model)

Shambles have selected the “Mythical Beasts” range and decided to contemplate on “Pegasus” and “Phoenix.”  They would now like to find the right mix of these two products in order to maximise profit.  Every toy has to go through two processes during manufacture: sewing and stuffing.
Pegasus takes 30 minutes to sew whilst Phoenix takes 20 minutes; there are 10 hours (600 minutes) available for sewing each day.
Pegasus takes 20 minutes to stuff whilst Phoenix takes 25 minutes; there are 10 hours (600 minutes) available for stuffing each day.
Pegasus generates £4 profit per toy whilst Phoenix generates £5 profit per toy.

What is the maximum probable daily profit, and how many of each product must be produced in order to achieve this?
Use “Solver” in Microsoft Excel to solve this problem.  Include:
i) A print-out of cell values
ii) A print-out of cell formulae
iii) A print-out of the Solver dialogue box with optimisation conditions and constraints
iv) An Answer Report from Solver
v) A statement of the answer in words