Holland, Inc., has just completed development of a new cell phone. The new produ

Question

Holland, Inc., has just completed development of a new cell phone. The new product is expected to produce annual revenues of $1,350,000. Producing the cell phone requires an investment in new equipment, costing $1,440,000. The cell phone has a projected life cycle of five years. After five years, the equipment can be sold for $180,000. Working capital is also expected to increase by $180,000, which Holland will recover by the end of the new product's life cycle. Annual cash operating expenses are estimated at $810,000. The required rate of return is 8 percent.

1. Calculate the NPV using only discount factors from Exhibit 14B-1. Round present value calculations and your final answer to the nearest whole dollar.

2. Calculate the NPV using discount factors from both Exhibit 14B-1 and Exhibit 14B-2. Round present value calculations and your final answer to the nearest whole dollar.

Explanation / Answer

Hi,

Please find the answers as follows:

Part A:

NPV = 781072

Part B: Present Value Factors Picked up from both the exhibits

NPV = - 1620000 + 540000*(3.99271) + 360000*(.68058) = 781072

Thanks.

Amount (A) Present Value Factor 8% (B) Discounted Cash Inflow (A*B) Initial Cash Outflow -1620000 1 -1620000 Year 1 - Cash Inflow 540000 0.92593 500002 Year 2 - Cash Inflow 540000 0.85734 462964 Year 3 - Cash Inflow 540000 0.79383 428668 Year 4 - Cash Inflow 540000 0.73503 396916 Year 5 - Cash Inflow 900000 0.68058 612522 NPV

781072

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