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 $154,000 in each of
the first two years and $100,000 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 $380,000; it will have zero 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?
Net Present value = Present value of cash inflows - Present value of cash outflows
= 154000*PVF(5%, 1 year)+ 154000*PVF(5%, 2 years) + 100,000*PVF(5%, 3 years) + 100,000*PVF(5%, 4 years) - 87000 - 380,000
= 154000*0.952 + 154000*0.907 + 100,000*0.864 + 100,000*0.823 - 87000 - 380,000
= -$12,014
Note that the study cost is a sunk cost since already incurred and is not relevant
X Company is planning to launch a new product. A market research study, costing $150,000, was...
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