A sports nutrition company is examining whether a new high-performance sports drink should be added to its product line. A preliminary feasibility analysis indicated that the company would need to invest $17.5 million in a new manufacturing facility to produce and package the product. A financial analysis using sales and costs data supplied by marketing and production personnel indicated that the net cash flow (cash inflows minus cash outflows) would be $6.1 million in the first year of commercialization, $7.4 million in year 2, $7.0 million in year 3 and $5.5 million in year 4.

Senior company executive were undecided whether to move forward with the development of the new product. The requested that a discounted cash analysis be performed using two different discount rates: 20 percent and 15 percent.

A) Should the company proceed in the development of the product if the discount rate is 20 percent? Why?

B) Does the decision to proceed with the development of the product change if the discount rate was 15 percent? Why?