o increase Sales and Sales Growth, the top Marketing Manager suggested to price products slightly lower than the main competitor and at the same time increase product quality (competitor is not expected to react or make changes). This strategy would require an initial one time investment today of $1 million in advertising (and for some machines) and the Net Profit Margin (and Cash Flows) will be zero for years 1, 2, 3. However, sales are expected to grow 20% in years 1,2,3 (then sales will stabilize and sales growth will be 1% in year 4 and over). Also, in year 4 Net Profit Margin will return to 5% (due to economies of scale). (Some numbers have been pre-filled in the tables below). CURRENT BUSINESS SITUATION END OF YEAR 0 1 … Sales Growth 0% … Net Profit Margin 5% … Sales ($Millions) 80.00 … Profit or Cash Flow 4.00 … NPV(i=.15) 26.67 $Millions SUGGESTED SALES GROWTH STRATEGY (lower prices, increase quality) End of Year 0 1 2 3 4 … Sales Growth 20% 20% 20% 1% … Net Profit Margin 0% 0% 0% 5% … Sales ($Millions) 96 … PROFIT … Investment -1 … Cash Flow … NPV(i=.15) Strategy NPV (i=.15) ? $Millions What is the Strategy Net Present Value of the proposed Growth Strategy? (in $Millions)
o increase Sales and Sales Growth, the top Marketing Manager suggested to price products slightly lower than the main competitor and at the same time increase product quality (competitor is not expected to react or make changes). This strategy would require an initial one time investment today of $1 million in advertising (and for some machines) and the Net Profit Margin (and Cash Flows) will be zero for years 1, 2, 3. However, sales are expected to grow 20% in years 1,2,3 (then sales will stabilize and sales growth will be 1% in year 4 and over). Also, in year 4 Net Profit Margin will return to 5% (due to economies of scale). (Some numbers have been pre-filled in the tables below). CURRENT BUSINESS SITUATION END OF YEAR 0 1 … Sales Growth 0% … Net Profit Margin 5% … Sales ($Millions) 80.00 … Profit or Cash Flow 4.00 … NPV(i=.15) 26.67 $Millions SUGGESTED SALES GROWTH STRATEGY (lower prices, increase quality) End of Year 0 1 2 3 4 … Sales Growth 20% 20% 20% 1% … Net Profit Margin 0% 0% 0% 5% … Sales ($Millions) 96 … PROFIT … Investment -1 … Cash Flow … NPV(i=.15) Strategy NPV (i=.15) ? $Millions What is the Strategy Net Present Value of the proposed Growth Strategy? (in $Millions)
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
Problem 1PS
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To increase Sales and Sales Growth, the top Marketing Manager suggested to price products slightly lower than the main competitor and at the same time increase product quality (competitor is not expected to react or make changes). This strategy would require an initial one time investment today of $1 million in advertising (and for some machines) and the Net Profit Margin (and Cash Flows) will be zero for years 1, 2, 3. However, sales are expected to grow 20% in years 1,2,3 (then sales will stabilize and sales growth will be 1% in year 4 and over). Also, in year 4 Net Profit Margin will return to 5% (due to economies of scale). (Some numbers have been pre-filled in the tables below).
| CURRENT BUSINESS SITUATION | ||||||
| END OF YEAR | 0 | 1 | … | |||
| Sales Growth | 0% | … | ||||
| Net Profit Margin | 5% | … | ||||
| Sales ($Millions) | 80.00 | … | ||||
| Profit or Cash Flow | 4.00 | … | ||||
| NPV(i=.15) | 26.67 | $Millions | ||||
| SUGGESTED SALES GROWTH STRATEGY (lower prices, increase quality) | ||||||
| End of Year | 0 | 1 | 2 | 3 | 4 | … |
| Sales Growth | 20% | 20% | 20% | 1% | … | |
| Net Profit Margin | 0% | 0% | 0% | 5% | … | |
| Sales ($Millions) | 96 | … | ||||
| PROFIT | … | |||||
| Investment | -1 | … | ||||
| Cash Flow | … | |||||
| NPV(i=.15) | ||||||
| Strategy NPV (i=.15) | ? | $Millions |
What is the Strategy
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