X Company is planning to launch a new product. A market research study, costing $100,000, was conducted last year, indicating that the product will be successful for the next four years. Profits from sales of the product are expected to be $174,000 in each of the first two years and $120,000 in each of the last two years. The company plans to undertake an immediate advertising campaign that will cost $88,000. New manufacturing equipment will have to be purchased for $350,000; it will have zero disposal value at the end of the four years. Assuming a discount rate of 5%, what is the net present value of launching the new product?
Particulars | Time | PV Factor@5% | Amount | Present Value |
Present value of cash outflow: | ||||
Advertising Campaign cost | 0 | 1.00 | (88000) | (88000) |
Equipment Cost | 0 | 1.00 | (350000) | (350000) |
Total Present value of Cash outflows | (438,000) | |||
Present value of cash Inflow: | ||||
Cash inflows: | 1 | 0.9524 | 174000 | 165717.60 |
2 | 0.9070 | 174000 | 157818.00 | |
3 | 0.8638 | 120000 | 103656.00 | |
4 | 0.8227 | 120000 | 98724.00 | |
Total Present value of Cash Inflows | 525915.60 | |||
Net present value | $87915.60 |
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