Question

Allison’s Dresswear Manufacturers is preparing a strategy for the fall season. One alternative is to expand its traditional ensemble of wool sweaters. A second option would be to enter the cashmere sweater market with a new line of high-quality designer label products. The marketing department has determined that the wool and cashmere sweater lines offer the following probability of outcomes and related cash flows.
  

	Expand Wool Sweaters Line							Enter Cashmere Sweaters Line
Expected Sales	Probability			Present Value of Cash Flows from Sales				Probability			Present Value of Cash Flows from Sales
Fantastic		.3		$	270,000				.2		$	338,000
Moderate		.4			163,000				.5			314,000
Low		.3			88,300				.3			0

The initial cost to expand the wool sweater line is $150,000. To enter the cashmere sweater line, the initial cost in designs, inventory, and equipment is $160,000.
  
a. Calculate net present value if, Allison’s Dresswear Manufacturers decides to: (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to the nearest whole dollar.)

Expand wool sweaters line __________________

Enter Cashmere sweaters line_____________

Answer 1

Expand wool sweaters line
Expected sales	probability	present value of cash flow from sales	probability*present value of cash flow from sales	probability*present value of cash flow from sales
fantastic	0.3	270000	.3*270000	81000
Moderate	0.4	163000	.4*163000	65200
low	0.3	88300	.3*88300	26490
net Present value = sum of probability*present value of cash flow from sales				172690
less net initial cost				-150000
net present value				22690
Enter Cashmere sweaters line
Expected sales	probability	present value of cash flow from sales	probability*present value of cash flow from sales	probability*present value of cash flow from sales
fantastic	0.2	338000	.2*338000	67600
Moderate	0.5	314000	.5*314000	157000
low	0.3	0	.3*0	0
sum of present value of cash flow from sales				224600
net initial cost				-160000
net present value				64600
NPV is higher in case of cashmere Sweater line market