Payne Medical Labs is evaluating two new products to introduce into the marketpl

Question

Payne Medical Labs is evaluating two new products to introduce into the marketplace. Product 1 (a new form of plaster cast) is relatively low in risk for this business and will carry a 13 percent discount rate. Product 2 (a knee joint support brace) has a less predictable outcome and will require a higher discount rate of 17 percent. Either investment will require an initial capital outlay of $106,000. The inflows from projected business over the next five years are given below.

Calculate net present value for the Product 1 and Product 2. UseAppendix B.(Round "PV Factor" to 3 decimal places, intermediate and final answers to the nearest dollar amount.Omit the "$" sign in your response.)

Payne Medical Labs is evaluating two new products to introduce into the marketplace. Product 1 (a new form of plaster cast) is relatively low in risk for this business and will carry a 13 percent discount rate. Product 2 (a knee joint support brace) has a less predictable outcome and will require a higher discount rate of 17 percent. Either investment will require an initial capital outlay of $106,000. The inflows from projected business over the next five years are given below.

Explanation / Answer

Product 1

Discount rate at 13%

Year 1: 0.885 x 32000 = $28320

Year 2: 0.783 x 37900 = $29676

Year 3: 0.693 x 44900 = $31116

Year 4: 0.613 x 40700 = $24949

Year 5: 0.543 x 22100 = $12000

NPV = -106000 + 28320 + 29676 + 31116 + 24949 + 12000 = $20061

Product 2

Discount rate at 17%

Year 1: 0.855 x 22900 = $19580

Year 2: 0.731 x 30400 = $22222

Year 3: 0.624 x 35700 = $22277

Year 4: 0.534 x 34000 = $18156

Year 5: 0.456 x 72400 = $33014

NPV = -106000 + 19580 + 22222 + 22277 + 18156 + 33014 = $9249

Hope this helps!

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