Payne Medical Labs is evaluating two new products to introduce into the marketpl

Question

Payne Medical Labs is evaluating two new products to introduce into the marketplace. Product 1 (a new form of plaster cast) is relatively low in risk for this business and will carry a 13 percent discount rate. Product 2 (a knee joint support brace) has a less predictable outcome and will require a higher discount rate of 17 percent. Either investment will require an initial capital outlay of $106,000. The inflows from projected business over the next five years are given below.

Calculate net present value for the Product 1 and Product 2. Use Appendix B. (Round "PV Factor" to 3 decimal places, intermediate and final answers to the nearest dollar amount. Omit the "$" sign in your response.)

Years Product 1
Product 2 1 $ 32,200 $ 22,900 2 37,900 30,400 3 44,900 35,700 4 40,700 34,000 5 22,100 72,400

Explanation / Answer

net present value for the Product 1= -106,000+(32,200/1.13)+( 37,900/1.13^2)+( 44,9001.13^3)+( 40,700 /1.13^4+(22,100/1.13^5)= $ 20251.854

net present value for the Product 2= -106,000+(22,900/1.17)+( 30,400/1.17^2)+( 35,700/1.17^3)+( 34,000/1.17^4) +(72,400/1.17^5)= $9236.839

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