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X company is planning to launch a new product. Market research, costing $ 190,000, 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 compaign that will also cost $190,000. New manufacturing equipment will have to be purchased - it will cost $300,000 and have a disposal value at the end of four years of $160,000. It is expected that profits from sales of the product will be $167,000 in each of the first two years and $120,000 in each of the last two years. Assuming a discount rate of 5%, what is the net present value of launching the new product?
Please show me the steps. Thanks.
Explanation / Answer
Year Cash flows Discount factor @ %5 Discounted Cash Flow 0 -190000 1 -190000 0 -300000 1 -300000 1 167000 0.9524 159047.619 2 167000 0.9070 151473.923 3 120000 0.8638 103660.512 4 120000 0.8227 98724.297 4 160000 0.8227 131632.396 NPV 154538.7 $190000 spend on Research is a sunk cost so it is not taken in account $190000 is advertising cost we need to take it whicle calculating NPV as it is incurred presently Salavage value is taken in 4th year as it is inflow of cash Otion 2 if advertisemnet cost considered irrevalant because it is just to ensure the success Year Cash flows Discount factor @ %5 Discounted Cash Flow 0 -300000 1 -300000 1 167000 0.9524 159047.619 2 167000 0.9070 151473.923 3 120000 0.8638 103660.512 4 120000 0.8227 98724.297 4 160000 0.8227 131632.396 NPV 344538.7 $190000 spend on Research is a sunk cost so it is not taken in account $190000 is advertising cost which is just incurred forr success so not taken Salavage value is taken in 4th year as it is inflow of cash
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