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
The McGregor Whisky Company is proposing to market diet scotch. The product will first be test...
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