Question

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 $152.000 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 wro disposal value at the end of the four years. Assuming a discount rate of 5%, what is the net present value of launching the new product? 10. AO S-1,288 BO S-1.610 CO S-2,012 DO 8-2,616 EO $-3,145 FO 5.3,931 want machines with either Machine A or Machine B. The tefl life of both mom Estimated annual cash flows with the two

Answer 1

Solution:

Computation of NPV - X Company
Particulars	Period	Amount	PV factor at 5%	Present Value
Cash outflows:
Initial investment (Equipment + Advertising)	0	$463,000.00	1	$463,000
Present Value of Cash outflows (A)				$463,000
Cash Inflows
Year 1	1	$152,000.00	0.952	$144,704
Year 2	2	$152,000.00	0.907	$137,864
Year 3	3	$106,000.00	0.864	$91,584
Year 4	4	$106,000.00	0.823	$87,238
Present Value of Cash Inflows (B)				$461,390
Net Present Value (NPV) (B-A)				-$1,610

Hence option B is correct.