Neptune Biometrics, despite its promising technology, is having difficulty gener

Question

Neptune Biometrics, despite its promising technology, is having difficulty generating profits. Having raised $85 million in an initial public offering of its stock early in the year, the company is poised to intro- duce a new product, an inexpensive fingerprint door lock. If Neptune engages in a promotional campaign costing $55 million this year, its annual after-tax cash flow over the next five years will be only $1 mil- lion. If it does not undertake the campaign, it expects its after-tax cash flow to be - $15 million annually for the same period. Assuming the company has decided to stay in its chosen business, is this campaign worthwhile when the discount rate is 8 percent? Why or why not?

Explanation / Answer

According to the question, the per year returns after the campaign is 1 million per year.

And if the per year returns without the campaign are 15 million annually for the same period, it makes no sense that there should be a promotional campaign. Therefore, it is not worthwhile to undertake this promotional campaign.

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