Question
In January of 1996, Honda decided it would be profitable to sell SUVs, as that market was booming. Lacking the time to develop one on
In January of 1996, Honda decided it would be profitable to sell SUVs, as that market was booming. Lacking the time to develop one on their own, Honda decided to buy Isuzu Rodeos and rebrand them as Honda Passports. Honda calculated that the initial investment in marketing the Passport would cost $250 million. (Assume this investment is made at the beginning of January, 1996.) In addition, the financial managers at Honda projected total cash flows of $150 million at the end of 1996, $78 million at the end of 1997, $53 million at the end of 1998, and $26 million at the end of 1999. Honda would stop selling the Passport at the end of 1999. The financial managers did not take into account the fact that the Isuzu Rodeo/Honda Passport was an unreliable SUV, which ended up hurting Hondas reputation for quality after the Passports had been on the road for a few years. For ten years, starting at the end of 2000, it is estimated that Hondas future total cash flows would be reduced by $6 million per year because of the negative reputation effects of the Passport. Assume Honda calculated the weighted average cost of capital for the Passport project to be 9.3%. Did the Passport generate a positive NPV for Honda?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started