You have developed a new gadget that will fundamentally change the was we watch

Question

You have developed a new gadget that will fundamentally change the was we watch TV. The device is a combination of an HDMI dongle and a smartphone app to control TV recordings in the cloud.You have completed R&D and are ready for your first production run for a market launch. The problem is that you ran out of money. You estimate that your venture requires an investment of $3.75 M in order to get the product out the door. You will begin sales immediately.Based on market analysis, you identify that your revenue from this venture will be as follows:

Market Year 1: $2.0 M

Market Year 2: $3.5 M

Market Year 3: $2.7 M

Assuming a discount rate of 0.1, what is the NPV and Discounted Payback Period for this venture?

As an investor, why would you want to invest in this effort (or why would you not invest)?

Please show your calculation work

Explanation / Answer

Discount factor is 1.1

This assumes that cash flows occur at end of year

NPV = - 3.75 + 2/1.1 + 3.5/1.1^2 +2.7/1.1^3 = 2.98

The present values of the cash flows are 1.818, 2.89 and 2.03 respectively.

Since 3.75 > 1.818 but less than (2.89+1.818), the answer lies between 1&2 years

Disvounted payback period = 1+ (3.75-1.818)/2.89 = 1.668 years

Since NPV is positive, investors should invest in the project

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