A company is developing a new product. The development of the product requires an initial investment of $130,000 with further investments of $70,000 in year 1, $50,000 in year 2 and $15,000 in year 3. The company will launch the product on the market in year 3 and the company expects annual profits of $40,000 from year 3 to year 8. At the end of year 8, the company expects to terminate the production line and sell it to a competitor for $80,000. The company's required rate of return is 8%. a. Calculate the NPV for this product. Round to the nearest cent b. Should the company proceed with developing the product? Yes No

A company is developing a new product. The development of the product requires an initial investment of $130,000 with further investments of $70,000 in year 1, $50,000 in year 2 and $15,000 in year 3. The company will launch the product on the market in year 3 and the company expects annual profits of $40,000 from year 3 to year 8. At the end of year 8, the company expects to terminate the production line and sell it to a competitor for $80,000. The company's required rate of return is 8%. a. Calculate the NPV for this product. Round to the nearest cent b. Should the company proceed with developing the product? Yes No

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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QUESTION 5 A company is thinking about marketing a new product. Up-front costs to market and develop the product are $14.56 Million. The product is expected to generate profits of $1.39 million per year for 26 years. The company will have to provide product support expected to cost $294051 per year in perpetuity. Furthermore, the company expects to invest $40821 per year for 11 years for renovations on the product. This investing would start at the end of year 7. Assume all profits and expenses occur at the end of the year. Calculate the NPV of this project if the interest rate is 7.45%. NOTE: Answer in $. If your answer is 220M, you must answer 220000000.0000. HINT. Compute the present value of all cash flows and then combine them.
Question 1 of 9 A company has to choose between two different investments. Investment A: This investment requires an immediate outlay of $70,000 and another investment of $40,000 in year 3. The investment will return annual profits of $45,000 from year 2 to year 8. At the end of year 8, the investment has a residual value of $15,000. Investment B: This investment requires an immediate outlay of $25,000 and additional investments of $10,000 per year from year 1 to year 3. The investment will return annual profits of $27,000 from year 4 to year 8. At the end of year 8, the investment has a residual value of $15,000. The cost of capital is 8.5%. a. Calculate the NPV for investment A. Round to the nearest cent b. Calculate the NPV for investment B. Round to the nearest cent c. Which investment should the company choose? Investment A Investment B Niether
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3.44 A company is about to invest in a joint venture research and development project with another company. The project is expected to last eight years, but yearly payments the company makes will begin immediately (i.e., a payment is made today, and the last payment is eight years from today). Salaries will account for $40 000 of each payment. The remainder of each payment will cover equipment costs and facility overhead. The initial (immediate) equipment and facility cost is $26 000. Each subsequent year the figure will drop by $3000 until a cost of $14 000 is reached, after which the costs will remain constant until the end of the project. (a) Draw a cash flow diagram to illustrate the cash flows for this situation. (b) At an interest rate of 7%, what is the total future worth of all project payments at the end of the eight years?
Revenues generated by a new tad product are forecast as follows: Year 1 2 3 Thereafter Expenses are expected to be 40% of revenues, and working capital required in each year is expected to be 20% of revenues in the following year. The product requires an immediate investment of $46,000 in plant and equipment. Required: a. What is the initial investment in the product? Remember working capital. b. If the plant and equipment are depreciated over 4 years to a salvage value of zero using straight-line depreciation, and the firm's tax rate is 20%, what are the project cash flows in each year? c. If the opportunity cost of capital is 10%, what is project NPV? d. What is project IRR? Complete this question by entering your answers in the tabs below. Req A Year Revenues $ 40,000 20,000 15,000 10,000 0 1 If the plant and equipment are depreciated over 4 years to a salvage value of zero using straight-line depreciation, and the firm's tax rate is 20%, what are the project cash flows in each…

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