X Company is planning to launch a new product. Market research, costing $130,000
ID: 2462317 • Letter: X
Question
X Company is planning to launch a new product. Market research, costing $130,000, has already been done indicating that the product will be successful for four years, but to insure success, the company plans to undertake an immediate advertising campaign that will also cost $130,000. New manufacturing equipment will have to be purchased - it will cost $360,000 and have a disposal value at the end of four years of $13,000. It is expected that profits from sales of the product will be $176,000 in each of the first two years and $106,000 in each of the last two years. Assuming a discount rate of 6%, what is the net present value of launching the new product?
A: $2,480 B: $3,596 C: $5,214 D: $7,561 E: $10,963 F: $15,896Explanation / Answer
Market research cost Is a sunk cost as they will be incurred whether product s is successful or not
Initial cost = $ 360000 + 130000 = 490000
Present value of cash flow = (PVF@6%,1*CF1).....(PVF@6%,4 *Total cash flow 4 )
= (.94340 * 176000)+ (.89000*176000)+(.83962* 106000)+(.79209* 119000)
= 166038.4+ 156640+ 88999.72+ 94258.71
= 505936.83
NPV = 505936.83 - 490000 = 15936.83
Correct option is "E" - 15896 [Difference of (15936.83-15896 = 40.83 )Is due to decimal in present value factor]
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