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 $ 12 million, and you expect to earn a cash flow of $ 2.8 million per year for the next 5 years. Create a table for the NPV profile for this project for discount rates ranging from 0 % to 30 % (in intervals of 5 %). For which discount rates is the project attractive?
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Expert Solution
Solution:-
| Net Present Value of Product | |||
| Year | Cash Flows | Discounting Factor @ 20% | Present Value |
| 0 | -12000000 | 1 | -12000000 |
| 1 | 2800000 | 0.833 | 2333333.33 |
| 2 | 2800000 | 0.694 | 1944444.44 |
| 3 | 2800000 | 0.579 | 1620370.37 |
| 4 | 2800000 | 0.482 | 1350308.64 |
| 5 | 2800000 | 0.402 | 1125257.20 |
| NPV | -3626286.01 | ||
| Net Present Value of Product | |||
| Year | Cash Flows | Discounting Factor @ 25% | Present Value |
| 0 | -12000000 | 1 | -12000000 |
| 1 | 2800000 | 0.800 | 2240000.00 |
| 2 | 2800000 | 0.640 | 1792000.00 |
| 3 | 2800000 | 0.512 | 1433600.00 |
| 4 | 2800000 | 0.410 | 1146880.00 |
| 5 | 2800000 | 0.328 | 917504.00 |
| NPV | -4470016.00 | ||
| Net Present Value of Product | |||
| Year | Cash Flows | Discounting Factor @ 30% | Present Value |
| 0 | -12000000 | 1 | -12000000 |
| 1 | 2800000 | 0.769 | 2153846.15 |
| 2 | 2800000 | 0.592 | 1656804.73 |
| 3 | 2800000 | 0.455 | 1274465.18 |
| 4 | 2800000 | 0.350 | 980357.83 |
| 5 | 2800000 | 0.269 | 754121.41 |
| NPV | -5180404.69 | ||
Discount rate is the Project attractive-
5% is the discount rate on which project is attractive. NPV is acceptable in which it is greater than or equal to zero. At 5% discount Rate NPV is $1,22,534.
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jeff jeffy answered 1 year agoRelated Solutions
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