A firm is trying to determine if it should launch a product. The product has an...
A firm is trying to determine if it should launch a product. The product has an expected life of three years. It will bring in cash flows of $10,000 in each of the three years. The company estimates that it will invest $24,000 in product research and development costs. Assume a discount rate of 8%. Based on NPV, what should the firm do?
| a. |
Launch the product because the amount to be invested is greater than NPV |
|
| b. |
Not launch the product because NPV is greater than the amount to be invested |
|
| c. |
Launch the product because NPV is greater than the amount to be invested |
|
| d. |
Not launch the product because the amount to be invested is greater than NPV |
Homework Answers
c. Launch the product because NPV is greater than the amount to be invested
The basic rule is that an organization needs to invest in projects and assignments that have a positive NPV as that would logically be increasing a company's earnings.
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