X company is planning to launch a new product. Market research, costing $ 190,00
ID: 2461921 • Letter: X
Question
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 the step by step. Thanks.
Explanation / Answer
Initial investment=cost of equipment+advertising campaign
=300000+190000
=490000
Market reaearch cost are sunk cost therefore not considered here.
Cash flow ia taken as 160000 and 120000 and not adjusted for depreciation as method of providing depreciation is not mentioned and rate of depreciation or book value is not given which ia necessary for depreciation calculation. If they are given we can get the cash flow by adding depreciation in net income.
Npv=intial investment-pv of all cash inflows
=-490000+167000(1+.05)^-1+167000(1.05)^-2+120000(1.05)^-3+120000(1.05)^-4+160000(1.05)^-4
=-490000+159047.62+151473.92+103660.51+98724.30+1316312.40
=154538.75
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