Question

Question Description

 

Toaster	Robot
Investment	$650,000	$675,000
Year 1	$150,000	$400,000
Year 2	$500,000	$350,000
Year 3	$225,000	$250,000
Year 4	$125,000

 

Your company is looking at developing one of two potential kitchen products – either a toaster or a robot. The discount rate is 4%. Calculate the NPV for Toaster and Robot Which project is better? Why?

Answer 1

1.

Formula for Calculation of "Net Present Value (NPV)" :-

NPV = Present Value of Cash Inflows (PVCI) - Present Value of Cash Outflows (PVCO)

 

Statement showing calculation of "Net Present Value" of product "Toaster" :-

Particulars	Amount	PVF @ 4%	Present Value
Investment	$650,000	1	$650,000
PVCO (B)			$650,000
Cash Inflows:
Year 1	$150,000	0.961	$144,150
Year 2	$500,000	0.924	$462,000
Year 3	$225,000	0.889	$200,025
Year 4	$125,000	0.855	$106,875
PVCI(A)			$913,050

 

Therefore, Net Present Value (NPV) of "Toaster" = PVCI (A) - PVCO (B)

NPV of "Toaster" = $913,050 - $650,000

NPV of "Toaster" = $263,050

 

Statement showing calculation of "Net Present Value" of product "Robot" :-

Particulars	Amount	PVF @ 4%	Present Value
Investment	$675,000	1	$675,000
PVCO (D)			$675,000
Cash Inflows:
Year 1	$400,000	0.961	$384,400
Year 2	$350,000	0.924	$323,400
Year 3	$250,000	0.889	$222,250
PVCI(C)			$930,050

 

Therefore, Net Present Value (NPV) of "Robot" = PVCI (C) - PVCO (D)

NPV of "Robot" = $930,050 - $675,000

NPV of "Robot" = $255,050

 

Statement of Comparative:-

Particulars	"Toaster"	"Robot"
NPV	$263,050	$255,050

 

2.

As per the above "Statement of Comparative", it is very much clear that product "Toaster" is better because NPV of product "Toaster" is more than NPV of product "Robot".