Neptune Biometrics, despite its promising technology, is having difficulty gener

Question

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 introduce a new product, an inexpensive fingerprint doorlock. 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%? Why or why not?

Explanation / Answer

Funds that Neptune is having from Initial Public Offering are $85 million. If the company engages into Promotion campaign then initial cost related to it would be $55 million, again after tax flows for the five years would be $1 million Therefore,

Net flow of funds would be = - Initial expenditure + PV of cash flows (After tax) for a period of 5 years + Initial Public offering.

So, Net flow= -55 + 1* PVIFA (discount rate, 5 years)

Or, Net flow= -55 + 1* PVIFA (8%, 5 Years) + 85

Or, Net flow = -55 + 4+ 85 = $34 million Now.

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