Question

) A company is introducing a new product that they think will have a 10-year life...

) A company is introducing a new product that they think will have a 10-year life cycle,
with sales increasing steadily for 5 years, after which sales will decline steadily. The
company feels that the product will be so successful that they will make sales every day
of the year. As a result, they model future sales by assuming net cash flows are received
continuously over the 10-year horizon at the following rates;
100t, for 0?t?5
100(10-t), for 5<t?10.
The company requires an effective annual rate of return on any investment of 12.7.
What is the maximum amount of money the company should spend today to invest in
this new product?) A company is introducing a new product that they think will have a 10-year life cycle,
with sales increasing steadily for 5 years, after which sales will decline steadily. The
company feels that the product will be so successful that they will make sales every day
of the year. As a result, they model future sales by assuming net cash flows are received
continuously over the 10-year horizon at the following rates;
100t, for 0?t?5
100(10-t), for 5<t?10.
The company requires an effective annual rate of return on any investment of 12.7.
What is the maximum amount of money the company should spend today to invest in
this new product?) A company is introducing a new product that they think will have a 10-year life cycle,
with sales increasing steadily for 5 years, after which sales will decline steadily. The
company feels that the product will be so successful that they will make sales every day
of the year. As a result, they model future sales by assuming net cash flows are received
continuously over the 10-year horizon at the following rates;
100t, for 0?t?5
100(10-t), for 5<t?10.
The company requires an effective annual rate of return on any investment of 12.7.
What is the maximum amount of money the company should spend today to invest in
this new product?

Homework Answers

Answer #1

For the first 5 years, we use the formula 100t where t =0 to 5

Cash flow in year 0 = 100 *0 =0

Cash flow for year 1 = 100*1 = 100

Cash flow for year 2,3,4,5 = 200,300,400 and 500

Cash flow = 100*(10-t) for t = 6 to 10

Cash flow in year 6 = 100*(10-6) = 100*4 = 400

Cash flow in year 7 = 100*(10-7) =100*3 =300

Similarly cash flow in year 8,9 and 10 = 200,100,0

Present value of these futrure cash flows at 12.7% is calculated as follows:

PV = 0 +100/1.127 +200/1.127^2 + 300/1.127^3 +400/1.127^4 +500/1.127^5 +400/1.127^6 +300/1.127^7 +200/1.127^8 +100/1.127^9 +0 = 1,414.81

The maximum amount of money the company should spend today to invest in this new product =$1,414.81

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
McCormick and company is also considering introducing two new product lines to be made at the...
McCormick and company is also considering introducing two new product lines to be made at the new factory (if it is purchased). as a new member of MCS's finance team, you are asked to determine whether McCormick and Company should invest in the two product line expansions. Project A has lower future cash flows than project B, but Project A is more closely related to McCormick's existing product line, the company feels that it is less risky than project B....
HAL Corporation is introducing a new artificial intelligence product.  There are three possible outcomes:  If the product is...
HAL Corporation is introducing a new artificial intelligence product.  There are three possible outcomes:  If the product is highly successful, the company will be worth $900 million, if moderately successful $500 million, if a complete failure $100 million.  Each outcome is equally likely.  The results will be known two years from today.  There are no taxes on income or capital gains.   If the risk-free rate of return is 10%, what is the maximum amount of risk-free debt HAL can issue? If HAL’s unlevered equity premium...
Suppose ABC Company is introducing a new product. They expect to sell 1,000 units per year...
Suppose ABC Company is introducing a new product. They expect to sell 1,000 units per year at a price of $70 for five years. Costs of goods sold are estimated to be 65% of sales, fixed costs will be $3,000 per year and depreciation will be $10,000 per year. If the tax rate is 21%, construct a proforma income statement in Excel.
Please show how you got all calculations McCormick & Company is also considering introducing two new...
Please show how you got all calculations McCormick & Company is also considering introducing two new product lines to be made at the new factory (if it is purchased). As a new member of MCS's finance team, you are asked to determine whether McCormick & Company should invest in the two product line expansions. Project A has lower future cash flows than Project B, but because Project A is more closely related to McCormick's existing product line, the company feels...
1. A company is considering a 5-year project to open a new product line. A new...
1. A company is considering a 5-year project to open a new product line. A new machine with an installed cost of $120,000 would be required to manufacture their new product, which is estimated to produce sales of $40,000 in new revenues each year. The cost of goods sold to produce these sales (not including depreciation) is estimated at 49% of sales, and the tax rate at this firm is 27%. If straight-line depreciation is used to calculate annual depreciation,...
Parker Products manufactures a variety of household products. The company is considering introducing a new detergent....
Parker Products manufactures a variety of household products. The company is considering introducing a new detergent. The company's CFO has collected the following information about the proposed product. (Note: You may or may not need to use all of this information, use only the information that is relevant.) · The project has an anticipated economic life of 4 years. · The company will have to purchase a new machine to produce the detergent. The machine has an up-front cost (t...
A company has to select a new type of manufacturing equipment to manufacture a new product...
A company has to select a new type of manufacturing equipment to manufacture a new product to be sold in the next years. The company has two options of different equipment to invest. The first equipment costs 25.000 euro and the second equipment costs 30.000 euro. The company has prepared two budgets with the net cash flows for the next 5 years with the sales and the manufacturing costs including the depreciation of each equipment. Which equipment would you select?...
A company is considering a 5-year project to open a new product line. A new machine...
A company is considering a 5-year project to open a new product line. A new machine with an installed cost of $120,000 would be required to manufacture their new product, which is estimated to produce sales of $40,000 in new revenues each year. The cost of goods sold to produce these sales (not including depreciation) is estimated at 49% of sales, and the tax rate at this firm is 27%. If straight-line depreciation is used to calculate annual depreciation, what...
Your company is deciding whether to invest in a new machine.  The new machine will increase CF...
Your company is deciding whether to invest in a new machine.  The new machine will increase CF by $8 million per year.  You believe the technology used in the machine has 8 year life (so, no matter when you purchase it – it will be obsolete 10 years from today, not the day your investment starts).  The machine is currently priced at $26 million.  The price of the machine will decline by $5 million per year until it reaches $11 million, where it will...
Simpson Company is analyzing whether its new product will be profitable. The following data are provided...
Simpson Company is analyzing whether its new product will be profitable. The following data are provided for analysis:             Expected variable cost of manufacturing                   $30 per unit             Expected fixed manufacturing costs                          $48,000 per year             Expected sales commission                                         $6 per unit             Expected fixed administrative costs                           $12,000 per year a. [5 points] Simpson estimates that sales will probably be 10,000 units. What sales price per unit will allow the company to break even? b. [5 points] Simpson has decided...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT