X Company is planning to launch a new product. A market research study, costing $170,000, 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 $151,000 in each of the first two years and $109,000 in each of the last two years. The company plans to undertake an immediate advertising campaign that will cost $87,000. New manufacturing equipment will have to be purchased for $320,000; it will have zero disposal value at the end of the four years. Assuming a discount rate of 7%, what is the net present value of launching the new product?
Solution:
Computation of NPV - X Company | ||||
Particulars | Period | Amount | PV factor | Present Value |
Cash outflows: | ||||
Initial investment (Equipment + Advertising) | 0 | $407,000.00 | 1 | $407,000 |
Present Value of Cash outflows (A) | $407,000 | |||
Cash Inflows | ||||
Year 1 | 1 | $151,000.00 | 0.935 | $141,185 |
Year 2 | 2 | $151,000.00 | 0.873 | $131,823 |
Year 3 | 3 | $109,000.00 | 0.816 | $88,944 |
Year 4 | 4 | $109,000.00 | 0.763 | $83,167 |
Present Value of Cash Inflows (B) | $445,119 | |||
Net Present Value (NPV) (B-A) | $38,119 |
X Company is planning to launch a new product. A market research study, costing $170,000, was conducted last year, indic...
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 $151,000 in each of the first two years and $107,000 in each of the last two years. The company plans to undertake an immediate advertising campaign that will cost $78,000. New manufacturing equipment will have to be purchased for...
X Company is planning to launch a new product. A market research study, costing $130,000, 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 $167,000 in each of the first two years and $102,000 in each of the last two years. The company plans to undertake an immediate advertising campaign that will cost $92,000. New manufacturing equipment will have to be purchased for...
X Company is planning to launch a new product. A market research study, costing $130,000, 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 $151,000 in each of the first two years and $109,000 in each of the last two years. The company plans to undertake an immediate advertising campaign that will cost $90,000. New manufacturing equipment will have to be purchased for...
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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 $151,000 in each of the first two years and $107,000 in each of the last two years. The company plans to undertake an immediate advertising campaign that will cost $78,000. New manufacturing equipment will have to be purchased for...
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