X Company is planning to launch a new product. Market research, costing $150,000
ID: 2463357 • Letter: X
Question
X Company is planning to launch a new product. Market research, costing $150,000, 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 $150,000. 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 $20,000. It is expected that profits from sales of the product will be $180,000 in each of the first two years and $100,000 in each of the last two years. Assuming a discount rate of 5%, what is the net present value of launching the new product? Use the table below to apply discount rate.
Possible Answers:
Present Value of $1.00
Present Value of an Annuity of $1.00
A: $37,238 B: $43,569 C: $50,975 D: $59,641 E: $69,780 F: $81,643Explanation / Answer
X Company NPV analysis Year 0 Year 1 Year 2 Year 3 Year 4 Investment in Equipment (300,000) Investment in advertisement campaign (150,000) Profit each year 180,000 180,000 100,000 100,000 Salvage 20,000 Net Cash flows (450,000) 180,000 180,000 100,000 120,000 PV factor @5% 1 0.952 0.907 0.864 0.823 PV of cash flows (450,000) 171,360 163,260 86,400 98,760 NPV $ 69,780 So the correct option is E
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