Question

. A $2,179 BU 55,100 8 pt X Company is planning to launch a new product. A market research study, costing $150,000, 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 $12.00 in each of the first two years and $106.000 in each of the last two years. The company plans to undertake an immediate advertising campaign that will cost $83,000. New manufacturing equipment will have to be purchased for $380,000; it will have were disposal value at the end of the four years. Assuming a discount rate of 5%, what is the met present value of launching the new product? 10. AO S-1,288 BO -1,610 CO 8-2012 DO 8-2,516 EO 6-3,145 FO $3,931 its current machines with either Machine A or Machine B. The seful life of both on $73,000. Estimated annual cash flows with the two

Answer 1

Net Present value = Present value of cash inflows - Present value of cash outflows

= 152000/(1.05) + 152000/(1.05)^2 + 106000/(1.05)^3 +106,000/(1.05)^4 -83000 - 380000

= -$1596.37

i.e. -$1610 approx

i.e. B

Extra cost of Machine B = 73,000-52,000 = $21000
Year	Incremental Cash flows	Cumulative Cash flows
0	-21000	-21000
1	-1000	-22000
2	4000	-18000
3	5000	-13000
4	5000	-8000
5	3000	-5000
6	3000	-2000
7	2000	0
Hence, payback period = 7 years
i.e. F