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 | ||||||

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