8. Neptune Biometrics, despite its promising technology, is having diffi culty g

Question

8. Neptune Biometrics, despite its promising technology, is having diffi culty 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 vears 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

If it does undertake the campaign Marketing Campaign -$55,000,000.00 Initial Investment -$55,000,000.00 Year Cash Flow PV @ 8% Present Value 0 -$55,000,000.00 1 -$55,000,000.00 0 $85,000,000.00 1 $85,000,000.00 1 $1,000,000.00 0.925925926 $925,925.93 2 $1,000,000.00 0.85733882 $857,338.82 3 $1,000,000.00 0.793832241 $793,832.24 4 $1,000,000.00 0.735029853 $735,029.85 5 $1,000,000.00 0.680583197 $680,583.20 NPV $33,992,710.04 If it does not undertake the campaign Year Cash Flow PV @ 8% Present Value 0 $0.00 1 $0.00 0 $85,000,000.00 1 $85,000,000.00 1 -$15,000,000.00 0.925925926 -$13,888,888.89 2 -$15,000,000.00 0.85733882 -$12,860,082.30 3 -$15,000,000.00 0.793832241 -$11,907,483.62 4 -$15,000,000.00 0.735029853 -$11,025,447.79 5 -$15,000,000.00 0.680583197 -$10,208,747.96 NPV $25,109,349.44 Its better to engage in promotional campaign because its NPV is more than if does not take campaign.

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