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The McGregor Whisky Company is proposing to market diet scotch. The product will first be test marketed for two years in sout

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Answer #1

There are two possible NPV after two years

NPV if demand is not satisfactory = 0

NPV if demand is satisfactory = PV of inflow - Initial Outlay

                                                = £770,000/0.12 - £5,300,000

                                                = 6,416,667 - 5,300,000

                                                = £1,116,667

During the test phase initial cost will be £410,000. In case demand is satisfactory (67% Chances) NPV will be 1,116,667 and in case demand is not satisfactory NPV is 0. During the test phase McGregor demands a return of 20% on initial expenditure.

So, NPV of the project is = {(NPV x satisfactory chances) + (NPV x Unsatisfactory chances)}xPVIF(20%,2 years) - Initial Outlay

                                       = {(1,116,667 x 67%) + (0x33%)} x 0.694444 - £410,000

                                       = 748,166.89 x 0.694444 - £410,000

                                       = £519560 - 410000

                                       = £109,560

Net Present Value = £109,560

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