Project 2: investing $11 million to develop add-ons to existing products a. these add-ons to existing products are expected to generate $1.5 million positive cash flow every year thereafter on both new and existing products b. Calculate NPV. c. What is payback, PI, and IRR? What decisions should be made? d. If Skyhawk's management decided that they only need to collect their initial investment within 8 years on this project, should they invest? The rate of return = 8.28%
2. Project
2: investing $11 million to develop add-ons to existing products
a. these add-ons to existing products are expected to generate $1.5 million positive cash flow every year thereafter on both new and existing products
b. Calculate NPV.
c. What is payback, PI, and
d. If Skyhawk's management decided that they only need to collect their initial investment within 8 years on this project, should they invest?
The
Net present value is the value a project can add to the firm. The project can be accepted if the NPV is positive. IRR is the rate at which NPV is 0. The payback period is the time in years it takes the project to recover the costs.
a,b. The $1.5 million positive cash flow every year are a form of perpetuity.
Thus, the NPV is $7,115,942.03.
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