R&D Planning. A firm is in the process of assessing the economic prospects for a

Question

R&D Planning. A firm is in the process of assessing the economic prospects for a new bottling machine it is develop- ing. Future research and development expenses could range from $4 to $9 million, with a most likely value around $7 million. The life of the product will be anywhere from 3 to 10 years. Yearly unit sales will range from 100 to 500, with a most likely value around 300. The machines will sell for between $20,000 and $25,000 each. The production cost of the machine is expected to be $13,000 but could be as low as $11,000 or as high as $15,000. The firm’s discount rate is 10 percent.

a. What is the expected NPV for this new machine over ten years?

b. What is the probability of a positive NPV?

(Powell)

Powell, Stephen G. Simulation Using Spreadsheets Custom eText for University of Alabama - Tuscaloosa. Wiley Custom Select, 7/14/15. VitalBook file.

Explanation / Answer

Net present value is the discounted value of future cash flows.

1)

Following is the computation of the NPV:

Thus, the NPV of the 10 years of life is $67.8 million.

678,18,593.45

Year 1 2 3 4 5 6 7 8 9 10 Total Initial outlay     70,00,000.00 Unit sales                    100                    400                    700                   1,000                   1,300                   1,600                   1,900                   2,200                   2,500                   2,800 Unit sale price              25,000              25,000              25,000                 25,000                 25,000                 25,000                 25,000                 25,000                 25,000                 25,000 Unit development cost              15,000              15,000              15,000                 15,000                 15,000                 15,000                 15,000                 15,000                 15,000                 15,000 Unit profit              10,000              10,000              10,000                 10,000                 10,000                 10,000                 10,000                 10,000                 10,000                 10,000 Total profit        10,00,000        40,00,000        70,00,000         100,00,000         130,00,000         160,00,000         190,00,000         220,00,000         250,00,000         280,00,000 Discount factor at 10% 0.909090909 0.826446281 0.751314801 0.683013455 0.620921323 0.56447393 0.513158118 0.46650738 0.424097618 0.385543289 Present value of future flows     9,09,090.91 33,05,785.12 52,59,203.61     68,30,134.55     80,71,977.20     90,31,582.88     97,50,004.25 102,63,162.36 106,02,440.46 107,95,212.10 748,18,593.45 Net present value

678,18,593.45

Related Questions

Navigate

• Browse (All)
• Browse R
• Subjects

---

---

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