7.8 Neptune Biometrics, despite its promising technology, is having difficulty g
ID: 2486683 • Letter: 7
Question
7.8 Neptune Biometrics, despite its promising technology, is having difficulty generating profits. Having raised $85 million in an initial public offering of its stock early in the year, the company is poised to intro-duce a new product, an inexpensive fingerprint door lock. If Neptune engages in a promotional campaign costing $55 million this year, its annual after-tax cash flow over the next five years will be only $1 million. If it does not undertake the campaign, it expects its after-tax cash flow to be $15 million annually for the same period. Assuming the company has decided to stay in its chosen business, is this campaign worthwhile when the discount rate is 8 percent? Why or why not?
Explanation / Answer
SOLUTION :
Cost
55,000,000
annual cash flow
1,000,000
Present value of annual cash inflow
3,992,710
(1000000*3.99271)
Present value of cost
55,000,000
NPV
- 51,007,290
If it does not undertake the campaign
annual cash flow
- 15,000,000
Present value of annual cash inflow
- 59,890,651
(15000000*3.99271)
As calculated above both shows negative NPV but new product has better NPV (Negative but lower than its regular business.)
Cost
55,000,000
annual cash flow
1,000,000
Present value of annual cash inflow
3,992,710
(1000000*3.99271)
Present value of cost
55,000,000
NPV
- 51,007,290
If it does not undertake the campaign
annual cash flow
- 15,000,000
Present value of annual cash inflow
- 59,890,651
(15000000*3.99271)
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.