A consumer product firm finds that its brand of laundry detergent is losing mark
ID: 2752181 • Letter: A
Question
A consumer product firm finds that its brand of laundry detergent is losing market share, so it decides that it needs to “freshen” the product. One strategy is to maintain the current detergent formula, but to repackage the product. The other strategy involves a complete reformulation of the product in a way that will appeal to environmentally conscious consumers. The firm will pursue one strategy or the other, but not both. Cash flows from each proposal appear below, and the firm discounts cash flows at 13 percent.
Year
Repackage
Reformulate
0
-$3,000,000
-$25,000,000
1
2,000,000
10,000,000
2
1,250,000
9,000,000
3
500,000
7,000,000
4
250,000
4,000,000
5
250,000
3,500,000
a. Rank these investments based on their NPVs. Show you calculations!
b. Rank these investments based on their IRRs.
c. Rank these investments based on their PIs.
Year
Repackage
Reformulate
0
-$3,000,000
-$25,000,000
1
2,000,000
10,000,000
2
1,250,000
9,000,000
3
500,000
7,000,000
4
250,000
4,000,000
5
250,000
3,500,000
Explanation / Answer
in all a, b and c Repackage has a higher ranking as it has greater NPV, IRR and PI
PI is calculated as (sum of discounted cash flows + initial investment outlay)/ initial investment
Repackaging Discount rate 13.000% Year 0 1 2 3 4 5 Cash flow stream -3000000 2000000 1250000 500000 250000 250000 Discounting factor 1 1.13 1.2769 1.442897 1.630474 1.842435 Discounted cash flows project -3000000 1769912 978933.4 346525.1 153329.7 135690 NPV = Sum of discounted cash flows NPV A = 384389.6 Discounting factor = (1 + IRR)^(CORRESPONDING PERIOD IN YEARS) Discounted Cashflow= Cash flow stream/discounting factor PI= 1.12813Related Questions
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