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A company is thinking about marketing a new product. Up-front costs to market and develop the...

A company is thinking about marketing a new product. Up-front costs to market and develop the product are $10.12 Million. The product is expected to generate profits of $1.95 million per year for 28 years. The company will have to provide product support expected to cost $302,864 per year in perpetuity. Furthermore, the company expects to invest $35,742 per year for 12 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 7.04%.

Solutions

Expert Solution

Year Initital Investment Profit Per Year Renovation Total Cash Flow Present Value Factor Present Value
0 -10,120,000 -10,120,000 1.00 -10,120,000.00
1 1950000 1,950,000 0.93 1,821,748.88
2 1950000 1,950,000 0.87 1,701,932.81
3 1950000 1,950,000 0.82 1,589,997.02
4 1950000 1,950,000 0.76 1,485,423.22
5 1950000 1,950,000 0.71 1,387,727.23
6 1950000 1,950,000 0.66 1,296,456.68
7 1950000 -35742 1,914,258 0.62 1,188,988.81
8 1950000 -35742 1,914,258 0.58 1,110,789.25
9 1950000 -35742 1,914,258 0.54 1,037,732.86
10 1950000 -35742 1,914,258 0.51 969,481.37
11 1950000 -35742 1,914,258 0.47 905,718.77
12 1950000 -35742 1,914,258 0.44 846,149.82
13 1950000 -35742 1,914,258 0.41 790,498.71
14 1950000 -35742 1,914,258 0.39 738,507.76
15 1950000 -35742 1,914,258 0.36 689,936.25
16 1950000 -35742 1,914,258 0.34 644,559.28
17 1950000 -35742 1,914,258 0.31 602,166.74
18 1950000 -35742 1,914,258 0.29 562,562.35
19 1950000 1,950,000 0.27 535,375.76
20 1950000 1,950,000 0.26 500,164.20
21 1950000 1,950,000 0.24 467,268.50
22 1950000 1,950,000 0.22 436,536.34
23 1950000 1,950,000 0.21 407,825.43
24 1950000 1,950,000 0.20 381,002.83
25 1950000 1,950,000 0.18 355,944.35
26 1950000 1,950,000 0.17 332,533.96
27 1950000 1,950,000 0.16 310,663.26
28 1950000 1,950,000 0.15 290,231.00
Total of Present Value 13,267,923.41
less : Present Value of product support perpetuity (302864 / 0.0704) 4,302,045.45
Net Present Value 8,965,877.96

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