Snow Inc. has just completed development of a new cell phone. The new product is expected to produce annual revenues of $1,400,000. Producing the cell phone requires an investment in new equipment, costing $1,500,000. The cell phone has a projected life cycle of 5 years. After 5 years, the equipment can be sold for $180,000. Working capital is also expected to decrease by $200,000, which Snow will recover by the end of the new product’s life cycle. Annual cash operating expenses are estimated at $820,000. The required rate of return is 8%. 1. Calculate the NPV using only discount factors from the Present Value of a Single Amount table. 2. Calculate the NPV using discount factors from both tables (Single Amount and Present Value of an Annuity).
Snow Inc. has just completed development of a new cell phone. The new product is expected to produce annual revenues of $1,400,000. Producing the cell phone requires an investment in new equipment, costing $1,500,000. The cell phone has a projected life cycle of 5 years. After 5 years, the equipment can be sold for $180,000.
1. Calculate the NPV using only discount factors from the Present Value of a Single Amount table.
2. Calculate the NPV using discount factors from both tables (Single Amount and Present Value of an Annuity).
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