8. Neptune Biometrics, despite its promising technology, is having difficulty ge

Question

8. 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 campaigr worthwhile when the discount rate is 8 percent? Why or why not?

Explanation / Answer

Present Value factors for discount rate of 8 % are

(P/F,8%,1) = 0.9259

(P/F,8%,2) = 0.8573

(P/F,8%,3) = 0.7938

(P/F,8%,4) = 0.7350

(P/F,8%,5) = 0.6806

If Neptune engages in a promotional campaign, Net Present Value (NPV) of the project = 85 - 55 + 1*0.9259 + 1*0.8573 + 1*0.7938 + 1*0.7350 + 1*0.6806 = 33.99 ~ $ 34 m

If Neptune does not engage in a promotional campaign, Net Present Value (NPV) of the project = 15*0.9259 + 15*0.8573 + 15*0.7938 + 15*0.7350 + 15*0.6806 = $ 59.89 m

NPV of not engaging in promotional campaign is higher, therefore, this campaign is not worthwhile.

Related Questions

Navigate

• Browse (All)
• Browse 8
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.