Webster's wants to introduce a new product that has a startup cost of $7,800. The product has a 2year life and will provide cash flows of $6,700 in Year 1 and $4,300 in Year 2. The required rate of return is 31 percent. Should the product be introduced? Why or why not?
A. 
Yes; the NPV is $1,105.15. 

B. 
No; the IRR is 28.72 percent. 

C. 
Yes; the IRR is 28.72 percent 

D. 
No; the NPV is −$1,105.15 
Answer: Option B is correct.
Net present value=Initial investment+ Cash flow in year
1/(1+required rate of return)^1+Cash flow in year 2/(1+Required
rate of return)^2
Initial investment=$7,800
The product has a 2year life
Cash flow in year 1=$6,700
Cash flow in year 2=$4300
Required rate of return=31%
Net present value=$7,800+$6,700/(1+31%)^1+$4300/(1+31%)^2
=$7,800+$6,700/(1+31%)^1+$4300/(1+31%)^2
=$7,800+$6,700/(1.31)^1+$4300/(1.31)^2
=$7,800+$6,700/1.31+$4300/1.7161
=$7,800+$5114.503817+$2505.681487
=179.814696
Calculating IRR:
We can calculate the IRR using excel. We got the value of
IRR=28.72%
As the project has a negative NPV, it should not be introduced as it will decrease the shareholders' value.
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