5) (5 marks) The development of a new product will require the expenditure of $1

Question

5) (5 marks) The development of a new product will require the expenditure of $125,000 at the beginning of the next two years. When the product reaches the market in Year 3, it is expected to increase the firm's annual profit profit is received at the end of each yea be recoverable. If the firm's cost of capital is 12%, what is the Net Present Value of the project? Round your answer to the nearest cent. Should it proceed with the project? by $50,000 for eight years. (Assume that the r.) Then $75,000 of the original expenditures should

Explanation / Answer

PV of the Cost of investment = 125000 + 125000/1.12 = -236607

Value of the profits at the end of year 2 = 50000* (P/A, 12%, 8) = 50000*4.968

= 248400

PV of the profits = 248400/1.12^2 = 198023

PV of the capital recovery at end of year 10 = 75000/1.12^10 = 24148

NPV = -236607+ 198023 + 24148 =

= $ - 14436

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