Question

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 $167,000 in each of the first two years and $115,000 in each of the last two years. The company plans to undertake an immediate advertising campaign that will cost $95,000. New manufacturing equipment will have to be purchased for $340,000; it will have zero disposal value at the end of the four years. Assuming a discount rate of 6%, what is the net present value of launching the new product? Submit Answer Tries 0/3

Answer 1

Solution:

Computation of NPV - X Company
Particulars	Period	Amount	PV factor	Present Value
Cash outflows:
Initial investment (Equipment + Advertising)	0	$435,000.00	1	$435,000
Present Value of Cash outflows (A)				$435,000
Cash Inflows
Year 1	1	$167,000.00	0.943	$157,481
Year 2	2	$167,000.00	0.890	$148,630
Year 3	3	$115,000.00	0.840	$96,600
Year 4	4	$115,000.00	0.792	$91,080
Present Value of Cash Inflows (B)				$493,791
Net Present Value (NPV) (B-A)				$58,791