Cardinal Corporation is considering spending $440,000 at Time 0 to test a new product. Depending on...
Cardinal Corporation is considering spending $440,000 at Time 0 to test a new product. Depending on the test results, the firm may decide to spend $956,000 at Time 1 to start production of the product. If the product is introduced and it is successful, it will produce aftertax cash flows of $778,000 a year for Years 2 through 5. The probability of successful test and investment is 60 percent. What is the net present value at Time 0 given a 14 percent discount rate?
|
$264,912.33 |
||
|
$257,810.09 |
||
|
$249,930.62 |
||
|
$239,317.81 |
||
|
$231,006.15 |
Homework Answers
| Year | Cash flow | PVIF@14% | Present value |
| 0 | $ (440,000) | 1.00000 | -$440,000.00 |
| 1 | $ (573,600) | 0.87719 | -$503,157.89 |
| 2 | $ 466,800 | 0.76947 | $359,187.44 |
| 3 | $ 466,800 | 0.67497 | $315,076.70 |
| 4 | $ 466,800 | 0.59208 | $276,383.07 |
| 5 | $ 466,800 | 0.51937 | $242,441.29 |
| Net present value | $249,930.62 | ||
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