Allison’s Dresswear Manufacturers is preparing a strategy for
the fall season. One alternative is to expand its traditional
ensemble of wool sweaters. A second option would be to enter the
cashmere sweater market with a new line of high-quality designer
label products. The marketing department has determined that the
wool and cashmere sweater lines offer the following probability of
outcomes and related cash flows.
Expand Wool |
Enter Cashmere |
||||||||||||
Expected Sales | Probability |
Present Value of Cash Flows from Sales |
Probability |
Present Value of Cash Flows from Sales |
|||||||||
Fantastic | 0.4 | $ | 256,000 | 0.4 | $ | 388,000 | |||||||
Moderate | 0.4 | 183,000 | 0.4 | 297,000 | |||||||||
Low | 0.2 | 91,200 | 0.2 | 0 | |||||||||
The initial cost to expand the wool sweater line is $149,000. To
enter the cashmere sweater line, the initial cost in designs,
inventory, and equipment is $166,000.
a. Calculate net present value if, Allison’s
Dresswear Manufacturers decides to: (Negative amounts
should be indicated by a minus sign. Do not round intermediate
calculations. Round your answers to the nearest whole
dollar.)
Calculation of net present value |
expand wool sweater line: |
net present value = present value of cash inflow-initial investment |
present value of cash inflow = (0.4*256000+0.4*183000+0.20*91200) |
present value of cash inflow = 193840 |
net present value = 193840-149000 = 44840 |
cashmere sweater line |
present value of cash flow = (388000*0.40+297000*0.40+0*0.2) |
present value of cash flow = 274000 |
net present value = 274000-166000 = 108000 |
Please give a thumbs up if it is helpful & let me know if any doubt
Get Answers For Free
Most questions answered within 1 hours.