Question

A company is trying to determine when to undertake a project bringing a new toy to market. The company has conducted a detailed analysis on the economic and market conditions over the next several years. Based on an expected improvement in the economic conditions going forward, the company has built the following table detailing the financial projections for each year the toy could be introduced. If the project can be undertaken in any year, in what year should the firm introduce the new toy? Why?

Year	PVfcf	Cost	NPVt	NPV0
0	50,000	30,000	20,000	20,000
1	55,000	31,500	23,500	20,435
2	60,500	33,075	27,425	20,737
3	66,550	34,729	31,821	20,923
4	73,205	36,465	36,740	21,006
5	80,526	38,288	42,237	20,999

Answer 1

The correct answer is 4th Year

Net present value refers to the the net benefit of undertaking the project, it is calculated by computing the present value of all the cash flows less the initial investment, The higher the net present value the beneficial it would be for the company as it shows the firm is generating maximum benefit for a given level of risk which is the discount rate.

In Year 4th, The net present value of introducing the toy is the highest among the other years, which shows that firm will generate the highest benefit in this year for a given cost of capital or discount rate.