X company is planning to launch a new product. Market research, costing $140,000
ID: 2461376 • Letter: X
Question
X company is planning to launch a new product. Market research, costing $140,000, has already been done indicating that the product will be successful for four years, but to insure success, the company plans to undertake an immediate advertising campaign that will also cost $140,000. New manufacturing equipment will have to be purchased-it will cost $370,000 and have a disposal value at the end of the four years of $12,000. It is expected that profits from sales of the product will be $171,000 in each of the first two years and $113,000 in each of the last two years. Assuming a discount rate of 5%, what is the net present value of launching the new product?
The answers I can choose from are 7865,8888,10043,11349,12824,14492.
Explanation / Answer
Year Cash Outflow Cash Inflow Total Cashflow PV @ 5% PV of Net Cash flow 0 370000 -370000 1 -370000 1 171000 171000 0.952 162857 2 171000 171000 0.907 155102 3 113000 113000 0.864 97614 4 113000 113000 0.823 92965 4 12000 12000 0.823 9872 Total NPV 148411 As total NPV is positive new project can be launched. As sunk cost like Market research and Advertising Campaign will not be recovered even if the project is taken so this would not be considered for calculating NPV.
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