Anew product launch has the following cash flow attibutes: Start-up cost at the

Question

Anew product launch has the following cash flow attibutes: Start-up cost at the beginning of the launch (t 0): $2,000,000 Annual production costs $100,000 per year $1,000,000 per year 5 years .Product Life Cycle: Using the interest tables and an effective annual interest rate of 8%, determine the following: 1) cash flow diagram, 2) present value of the costs 3) present value of the revenue, and 4) Net Present Value of this transaction. If the goal of the company is a MARR of at least 12%, do you recommend manufacturing and selling this product? (20 pts)

Explanation / Answer

1) The cash flow would be as follows-

Year 0-

Start Up Cost:

-2,000,000

Year 1 to Year 5

-100,000 ( Annual Costs)

+2,000,000 ( Annual Revenue)

2) Present Value of costs -

Start up cost

-2,000,000

Annual Cost of 100,000 @ 8% for 5 years

-399,271

3) Present Value of Revenue of 1,000,000 @8% for 5 years-

+3,992,710

4) Net present value of transaction-

Total Revenue-Total Costs:

3,992,710-399,271-2,000,000= $1,593,439

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---