A technology company is planning on introducing a new fitness watch to the marke

Question

A technology company is planning on introducing a new fitness watch to the market. The company is deciding between the following two options:

Option 1: Rush the fitness watch to market by paying overtime and speeding up testing. The company will pay $6.3 million initially and will receive $3.4 million in annual profit from the watch during the first year. During years 2 through 5, the annual profit from the watch will decrease by $510,000 from the previous year. The watch will be obsolete by year 6 so the profit in year 6 and beyond is $0.

Option 2: Move more slowly in getting the watch to market. In this option, the company pays $1.4 million initially and $1.4 million in the first year. Since the watch is introduced to the market later than with option 1, the company will earn less revenue with option 2. The company will earn an annual profit of $2.22 million in year 2. In years 3 through 5, the annual profit from the watch will decrease by $270,000 from the previous year. The watch will still be obsolete by year 6 so the profit in year 6 and beyond is $0.

At what MARR would the company be indifferent between the two options? Express your answer as a percentage, and the answer could be a negative number.

Explanation / Answer

At MARR of 18.62% the company would be indifferent between the two options.

Year Option 1 Option 2 Cash flow difference 0 -6300000 -1400000 -4900000 1 3400000 -1400000 4800000 2 2890000 2200000 690000 3 2380000 1930000 450000 4 1870000 1660000 210000 5 1360000 1390000 -30000 6 0 0 0 IRR 31.25% 42.67% 18.62% NPV 0 0 0

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.