Question

Comparing Investment Criteria Consider two mutually exclusive new product launch projects that Nagano Golf is considering. Assume the discount rate for both products is 15 percent Project A: Nagano NP-30. Professional clubs that will take an initial investment of $735,000 at Year 0. For each of the next 5 years (Years 1-5), sales will generate a consistent cash flow of $239,000 per year. Introduction of new product at Year 6 will terminate further cash flows from this project. Project B: Nagano NX-20. High-end amateur clubs that will take an initial investment of $460,000 at Year 0. Cash flow at Year 1 is $130,000. In each subsequent year, cash flow will grow at 10 percent per year. Introduction of new product at Year 6 will terminate further cash flows from this project.

Answer 1

Project A
Nagano-NP-30
Initial investment	-735000
PV at Yr.0 of $ 239000 C/fs each yr.
239000*3.35216	801166
(P/A,i=15%;n=5)
NPV of Project A	66166
Project B
Nagano-NX-20
Initial investment	-460000
PV at Yr.0 of $ 130000 C/fs each yr.,growing at 10%
239000*3.35216	518159
(P/GA,i=15%;g=10% & n=5)
NPV of Project A	58159
Project A is better than project B , for its greater positive NPV