Question

Please solve: A company needs to decide if it will proceed with two new products. The...

Please solve: A company needs to decide if it will proceed with two new products. The two initiatives have the following cash flow projections: Project A: year 0 (-800,000), year1 (220,000), year 2 (265,000), year3 (292,000), year 4 (317,00). Project B: year0 (-650,000), years 1-5 (175,000). Project A= 11% rate of return. Project B= 11.5%rate of return. The company has a $1.5 million budget for to spend on projects for the year. Should the company move forward with one, both or neither of the two new products? Thanks

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Answer #1

As the npv of Project A is positive at $35590 and of Project B is negative at $11267, so it will be advisable to the company to move forward with Project A and invest $800000 in it only.

Working:

Project A Present Value of Cash inflow (220000*0.9009)+(265000*0.8116)+(292000*0.7312)+(317000*0.6587)
=835590.3 -initial investment 800000 =NPV 35590.3
Project B Present Value of Cash inflow(175000*3.6499)
=638732.5 -650000 =NPV -11267.5
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