## Payback

A toy company plans on launching a new product using injection molding for mass production. An internal review resulted in the below estimates:

Initial Investment: $110,000 Cost per item:$20
Sale price per item: $55 Production volume (equally distributed throughout the year): Year 1: 500 units Year 2: 750 units Year 3: 750 units Year 4+: 1,000 units Ignoring inflation, interest, depreciation etc, what is the estimated year of production in which the company will break even with the new toy line up? Hint The initial cost is$110,000. Net profit from each unit sale is $55 -$20 = $35. The initial cost is$110,000. Net profit from each unit sale is $55 -$20 = $35. We can solve the problem by determining each year's profit. Year 1: 500 units x$35 = $17,500 (cumulative$17,500)
Year 2: 750 units x $35 =$26,250 (cumulative $43,750) Year 3: 750 units x$35 = $26,250 (cumulative$70,000)
Year 4: 1,000 units x $35 =$35,000 (cumulative $105,000) Year 5: 1,000 units x$35 = $35,000 (cumulative$140,000)

Sometime in early Year 5 the cumulative toy sale profits will exceed the project's initial investment.
Sometime in early Year 5 the cumulative toy sale profits will exceed the project's initial investment.