Consider two mutually exclusive new product launch projects that Nagano Golf is
ID: 2745066 • Letter: C
Question
Consider two mutually exclusive new product launch projects that Nagano Golf is considering. Assume the discount rate for Nagano Golf is 13 percent. (Do not round intermediate calculations. Round your "PI" answers to 3 decimal places (e.g., 32.161) and other answers to 2 decimal places. (e.g., 32.16)) Project A: Nagano NP-30. Professional clubs that will take an initial investment of $570,000 at time 0. Next five years (Years 1–5) of sales will generate a consistent cash flow of $205,000 per year. Introduction of new product at Year 6 will terminate further cash flows from this project. Project B: Nagano NX-20. High-end amateur clubs that will take an initial investment of $400,000 at Time 0. Cash flow at Year 1 is $120,000. In each subsequent year cash flow will grow at 10 percent per year. Introduction of new product at Year 6 will terminate further cash flows from this project. Year NP-30 NX-20 0 –$ 570,000 –$ 400,000 1 205,000 120,000 2 205,000 132,000 3 205,000 145,200 4 205,000 159,720 5 205,000 175,692
Explanation / Answer
NP-30:
Present value of cash inflows at 13% discount rate = Annual cash inflows x PVIFA 13%, 5 years = $ 205,000 x 3.5172 = $ 721,026
Initial investment = $ 570,000
NPV = $ ( 721,026 - 570,000) = $ 151,026
PI = Present value of cash inflows / Initial investment = 721,026 / 570,000 = 1.265
NX-20:
Present value of cash inflows at 13% discount rate = $ 120,000 x 0.8850 + $ 132,000 x 0.7831 + $ 145,200 x 0.6931 + $ 159,720 x 0.6133 + $ 175,692 x 0.5428 = $ 106,200 + $ 103,369.2 + $ 100,638.12 + $ 97,956.28 + $ 107,751.90 = $ 515,915.5
Initial investment = $ 400,000
NPV = $ ( 515,915.5 - 400,000) = $ 115,915.5
PI = $ 515,915.5 / $ 400,000 = 1.290