Allison’s Dresswear Manufacturers is preparing a strategy for the fall season. O
ID: 2826312 • Letter: A
Question
Allison’s Dresswear Manufacturers is preparing a strategy for the fall season. One alternative is to expand its traditional ensemble of wool sweaters. A second option would be to enter the cashmere sweater market with a new line of high-quality designer label products. The marketing department has determined that the wool and cashmere sweater lines offer the following probability of outcomes and related cash flows.
Expand Wool
Sweaters Line
Enter Cashmere
Sweaters Line
The initial cost to expand the wool sweater line is $129,000. To enter the cashmere sweater line, the initial cost in designs, inventory, and equipment is $145,000.
a. Calculate net present value if, Allison’s Dresswear Manufacturers decides to: (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to the nearest whole dollar.)
Expand Wool
Sweaters Line
Enter Cashmere
Sweaters Line
of Cash Flows
from Sales Probability Present Value
of Cash Flows
from Sales Fantastic .2 $ 240,000 .5 $ 344,000 Moderate .5 133,000 .3 259,000 Low .3 86,100 .2 0
Explanation / Answer
Expected Net Present Value [NPV] - Expand Wool Sweaters Line
Present Value
of Cash Flows
from Sales
Initial Cost
Net present Value
Probability
Expected Net Present Value
[NPV]
Fantastic
2,40,000
1,29,000
1,11,000
0.20
22,200
Moderate
1,33,000
1,29,000
4,000
0.50
2,000
Low
86,100
1,29,000
-42,900
0.30
-12,870
Expected Net Present Value [NPV]
$11,330
Expected Net Present Value [NPV] – Enter Cashmere Sweaters Line
Present Value
of Cash Flows
from Sales
Initial Cost
Net present Value
Probability
Expected Net Present Value
[NPV]
Fantastic
3,44,000
1,45,000
1,99,000
0.50
99,500
Moderate
2,59,000
1,45,000
1,14,000
0.30
34,200
Low
-
1,45,000
-1,45,000
0.20
-29,000
Expected Net Present Value [NPV]
$ 104,700
Net present value if, Allison’s Dresswear Manufacturers decides to Expand Wool Sweaters Line = $11,330
Net present value if, Allison’s Dresswear Manufacturers decides to Enter Cashmere Sweaters Line = $104,700
Present Value
of Cash Flows
from Sales
Initial Cost
Net present Value
Probability
Expected Net Present Value
[NPV]
Fantastic
2,40,000
1,29,000
1,11,000
0.20
22,200
Moderate
1,33,000
1,29,000
4,000
0.50
2,000
Low
86,100
1,29,000
-42,900
0.30
-12,870
Expected Net Present Value [NPV]
$11,330
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.