Question

X Company is considering launching a new product. After conducting a market research study that cost $4,600, the company estimates sales of 8,500 units in each of the next 4 years, with a contribution margin of $6.00 per unit. Additional fixed costs will be $17,160. Equipment costing $120,000 will have to be purchased; the equipment will have no salvage value at the end of 4 years.

What is the internal rate of return of launching the new product?  [Submit your rate as a decimal: .XX]

Answer 1

		Units Per Year	8500
		Contribution Margin	6.00
		Total Contribution Margin	51000
		Less: Additional Fixed Cost	17160
		Net Cash Inflow PA	33840
	Year	Cash Flow	Discount Factor @ 5%	Present Value	Discount Factor @ 4%	Present Value
	0	-120000	1.00	-1,20,000.0	1.00	-1,20,000
	1	33840	0.95	32,228.6	0.96	32,538
	2	33840	0.91	30,693.9	0.92	31,287
	3	33840	0.86	29,232.3	0.89	30,084
	4	33840	0.82	27,840.3	0.85	28,927
				-5.0		2,836
		Basis the above working, The IRR is 5%
	Note:	Market Survey is a Sunk Cost and is Irrelevant in Decision