Hit or Miss Sports is introducing a new product this year. If its see-at-night s

Question

Hit or Miss Sports is introducing a new product this year. If its see-at-night soccer balls are a hit, the firm expects to be able to sell 63,000 units a year at a price of $80 each. If the new product is a bust, only 43,000 units can be sold at a price of $75. The variable cost of each ball is $50, and fixed costs are zero. The cost of the manufacturing equipment is $7.5 million, and the project life is estimated at 10 years. The firm will use straight-line depreciation over the 10-year life of the project. The firm

Hit or Miss Sports is introducing a new product this year. If its see-at-night soccer balls are a hit, the firm expects to be able to sell 63,000 units a year at a price of $80 each. If the new product is a bust, only 43,000 units can be sold at a price of $75. The variable cost of each ball is $50, and fixed costs are zero. The cost of the manufacturing equipment is $7.5 million, and the project life is estimated at 10 years. The firm will use straight-line depreciation over the 10-year life of the project. The firm

Explanation / Answer

a-1.

If each outcome is equally likely, what is expected NPV? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer in dollars not in millions. Round your answer to the nearest dollar amount.)

   If its see-at-night soccer balls are a hit

Depreciation = 7.5*1000000/10= 750,000

Operating cash flow = (63000*(80-50) - 750,000)*(1-40%) + 750,000=1434000

NPV = -7.5*1000000 + 1434000/1.11 + 1434000/1.11^2 + 1434000/1.11^3

a-1.

If each outcome is equally likely, what is expected NPV? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer in dollars not in millions. Round your answer to the nearest dollar amount.)

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