Investment required in equipment: £150000; Project life cycle: 5 years, Value of equipment in year 6: £10000, Cash inflow as follows: . . Year 1 2 . 3 4 5 An existing product can be discontinued immediately or retained instead of the new product for five years. If retained a cash inflow of £12000 p.a would be expected. Discount rate (cost of capital) is 15% p.a. Calculate the expected net present value of the new product (NPV=£67,000) Advise the company whether to launch the new product or retain the existing one. (New product generates NPV = £67k + £10k equipment value at end; NPV of exisitng product = £40k - advise launch new product) £000 60 62 65 70 70
Investment required in equipment: £150000; Project life cycle: 5 years, Value of equipment in year 6: £10000, Cash inflow as follows: . . Year 1 2 . 3 4 5 An existing product can be discontinued immediately or retained instead of the new product for five years. If retained a cash inflow of £12000 p.a would be expected. Discount rate (cost of capital) is 15% p.a. Calculate the expected net present value of the new product (NPV=£67,000) Advise the company whether to launch the new product or retain the existing one. (New product generates NPV = £67k + £10k equipment value at end; NPV of exisitng product = £40k - advise launch new product) £000 60 62 65 70 70
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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DCF Example: A company is considering the launch of
a new product:
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Investment required in equipment: £150000; Project life cycle: 5 years, Value
of equipment in year 6: £10000, Cash inflow as follows:
.
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W
6
Year
1
2
3
4
5
An existing product can be discontinued immediately or retained instead of the
new product for five years. If retained a cash inflow of £12000 p.a would be
expected.
Discount rate (cost of capital) is 15% p.a.
Calculate the expected net present value of the new product (NPV=£67,000)
Advise the company whether to launch the new product or retain the existing one.
(New product generates NPV = £67k + £10k equipment value at end; NPV of
exisitng product = £40k - advise launch new product)
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