CH5 #10 A company is considering two alternative marketing strategies for a new product. Introducing the product will require an outlay of $15,000. With a low price, the product will generate cash proceeds of $10,000 per year and will have a life of two years. With a high price, the product will generate cash proceeds of $18,000 but will have a life of only one year. The hurdle rate for this project is 0.05. Which marketing strategy should be accepted?
CH5 #10 A company is considering two alternative marketing strategies for a new product. Introducing the product will require an outlay of $15,000. With a low price, the product will generate cash proceeds of $10,000 per year and will have a life of two years. With a high price, the product will generate cash proceeds of $18,000 but will have a life of only one year. The hurdle rate for this project is 0.05.
Which marketing strategy should be accepted?
The given information can be represented as
| Time | 0 | 1 | 2 |
| Cashflow | -15000 | 10000 | 10000 |
The hurdle rate is 0.05
So, Net Present Value of the low price strategy =
NPV = -Initial Investment + Present values of cash flows from year 1-2
NPV = -15000 + 10000/(1+0.05)^1 + 10000/(1+0.05)^2
NPV = -15000 + (9523.81 + 9070.29)
NPV = +3594.10
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