Allison’s Dresswear Manufacturers is preparing a strategy for the fall season. O

Question

Allison’s Dresswear Manufacturers is preparing a strategy for the fall season. One alternative is to expand its traditional ensemble of wool sweaters. A second option would be to enter the cashmere sweater market with a new line of high-quality designer label products. The marketing department has determined that the wool and cashmere sweater lines offer the following probability of outcomes and related cash flows.

The initial cost to expand the wool sweater line is $161,000. To enter the cashmere sweater line, the initial cost in designs, inventory, and equipment is $136,000.

a. Calculate net present value if, Allison’s Dresswear Manufacturers decides to:

Expand Wool Sweaters Line Enter Cashmere Sweaters Line Present Value of Cash Flows from Sales Present Value of Cash Flows from Sales $ 378,000 Probability Expected SalesProbability Fantastic Moderate Low $262,000 .3 .3 239,000 194,000 8,100

Explanation / Answer

wool sweater Cashmere sweater Expected present value [262000*.3]+[194000*.3]+[88100*.4] [378000*.3]+[239000*.3]+[0*.4] 172040 185100 Less:Initial cost -161000 -136000 NPV 11040 49100

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