X Company it planning to launch a new product. Market research, costing $140,000
ID: 2462526 • Letter: X
Question
X Company it 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. Now manufacturing equipment will have to be purchased - it will cost $360,000 and have a disposal value at the end of four years of $13,000. It is expected that profits from sales of the product will be $167,000 in each of the first two years and $110,000 in each of the last two years. Assuming a discount rate of 6%, what is the net present value of launching the new product?Explanation / Answer
The Market research cost already incurred is not relevant as it is sunk cost. Other costs are relevant as they are not yet done and will be done if the product has positive NPV.
As we can find, the NPV has come to - $4,037.78. So, the closest option to the answer is option B.
Calculations Years 0 1 2 3 4 A Advertisement -140000 B Equipment -360000 13000 C Profits 167000 167000 110000 110000 D = A+B+C Net Cash Flows -500000 167000 167000 110000 123000 E PV Factor @6% 1.0000 0.9434 0.8900 0.8396 0.7921 F = D x E Present Value -500000 157547.17 148629.41 92358.12 97427.52 G = Sum F Net Present Value -4037.783Related Questions
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