Neptune Biometrics, despit its promising technology, is having difficulty genera

Question

Neptune Biometrics, despit 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 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 flows 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

Answer:

To ascertain the worth of Campaign, we need to analyse the Net Present values with campaign and without campaign;

If the Company engages in Campaign then;

Net Present Value = $ 1,000,000 x PVAF@8% for 5 years - $ 55,000,000 = $ 1,000,000 x 3.99271 - $ 55,000,000

= - $ 51,007,290

If the Company does not engage in Campaign then;

NPV = - $ 15,000,000 x 3.99271 = -$ 59,890,651

Since, NPV when the Company engages in Campaign is less negative than NPV when the Company does not engage in Campaign, therefore, engaging in Campaign is better than not engaging in it.

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