D Question 6 4 pts CellTech is proposing the launch of its new Cphone 5. The Cph

Question

D Question 6 4 pts CellTech is proposing the launch of its new Cphone 5. The Cphone 5 will cost $7 million to develop and produce cash flows of $5 million for three years. The release of the Cphone 5 is also expected to cannibalize sales of the Cphone 4 and reduce the cash flows from Cphone 4 by $2 million for the next two years. If CelTech's cost of capital is 14.2%, should it go ahead with the Cphone 5? D Yes, creates $1.28 mil C Yes, creates $2.57 mil D Yes, creates $6.00 mil @ Yes, creates $457 mil Question 7 3 pts

Explanation / Answer

Step 1: Calculation of NPV of Launch of new Cphone 5

NPV = PV of inflows - PV of outflows

= (4.38+3.83+3.36) - 7

= 11.57 - 7

=4.57 millions

Step 2: Caculation of PV of sale lost on Cphone 4 from the launch of Cphone 5

PV of cashflows = 1.75 + 1.53

= 3.28

Step 3: Analysis

Launch of new Cphone 5 generates a NPV of $4.57millions. But it will lead to decrease in sale of Cphone 4 which have PV of $3.28millions. Hence it generate net NPV of $1.28million($4.57millions - $3.28millions).

Hence, go ahead with the Cphone 5 since it create $1.28million

Year 0 1 2 3 Interest Rate 14.2% 14.2% 14.2% 14.2% Cashflow(in $ in millions) (7) 5 5 5 Present Value ($ in millions)                 (7.00)                   4.38                         3.83                      3.36

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