X Company is planning to launch a new product. Market research, costing $180,000

Question

X Company is planning to launch a new product. Market research, costing $180,000, 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 $180,000. New manufacturing equipment will have to be purchased - it will cost $320,000 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 $160,000 in each of the first two years and $111,000 in each of the last two years. Assuming a discount rate of 4%, what is the net present value of launching the new product (you may not see your exact answer, but if it's correct, there should be one close to it).?

Explanation / Answer

Statement showing Cash flows Particulars Time PVf@4% Amount PV Cash Outflows (Advertising Campaign)                           -                        1.00       (180,000.00)       (180,000.00) Cash Outflows (Equipment Cost)                           -                        1.00       (320,000.00)       (320,000.00) PV of Cash outflows       (500,000.00) Cash inflows                      1.00                  0.9615         160,000.00         153,846.15 Cash inflows                      2.00                  0.9246         160,000.00         147,928.99 Cash inflows                      3.00                  0.8890         111,000.00            98,678.60 Cash inflows                      4.00                  0.8548         111,000.00            94,883.27 Cash inflows (Salvage Value)                      4.00                  0.8548            20,000.00            17,096.08 PV of Cash Inflows         512,433.09 NPV            12,433.09 Note Market Reasearch is sunk cost and thus ignored

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