Question

X Company is planning to launch a new product. A market research study, costing $140,000, 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 $159,000 in each of the first two years and $113,000 in each of the last two years. The company plans to undertake an immediate advertising campaign that will cost $85,000. New manufacturing equipment will have to be purchased for $350,000; 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?

Answer 1

Particulars	Year	PV Factor@5%	Amount	Present Value
Present value of cash outflow:
Advertising Campaign cost	0	1.00	(85000)	(85000)
Equipment Cost	0	1.00	(350000)	(350000)
Present value of Cash outflows				(435,000)
Present value of cash Inflow:
Cash inflows	1	0.9524	159000	151431.60
Cash inflows	2	0.9070	159000	144213.00
Cash inflows	3	0.8638	113000	97609.40
Cash inflows	4	0.8227	113000	92965.10
PV of Cash Inflows				486219.10
Net present value of launching the new product				$51,219.10