Question
In: Finance
Your firm is considering the launch of a new product, the XJ5. The upfront development cost...
Your firm is considering the launch of a new product, the XJ5. The upfront development cost is $10.0 million, and you expect to earn a cash flow of $3.0 million per year for the next five years. The appropriate hurdle rate for the XJ5 project is 10.00% per year. What is the XJ5 project’s net present value (NPV)?
| A. | -$1.37 million |
| B. | -$5.00 million |
| C. | -$10.00 million |
| D. | $1.37 million |
| E. | $5.00 million |
| F. | $11.37 million |
Solutions
Expert Solution
| Calculation of net present value: | |||
| Time | PVF @10% | Amount | PV |
| - | 1.00 | -10.00 | -10.00 |
| 1.00 | 0.9091 | 3.00 | 2.73 |
| 2.00 | 0.8264 | 3.00 | 2.48 |
| 3.00 | 0.7513 | 3.00 | 2.25 |
| 4.00 | 0.6830 | 3.00 | 2.05 |
| 5.00 | 0.6209 | 3.00 | 1.86 |
| 1.37 | |||
| Net present value is $1.37 million | |||
| So correct answer is D) $1.37 million | |||
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