Senior management is instructed by the board that shareholderRRR is 15%. Under this assumption how much shareholder capital does a product redesign create?

A) $40,493 B) $59,772 C) $82,946 D) Other

The PV of a value in year i is:

A) the value in year i divided by one plus the Rate of Return raised to the power of i B) the value in year i divided by one raised to the power of i plus the Rate of Return. C) the value in year i raised to the power of i divided by one plus the Rate of Return. D) the value in year i divided by the Rate of Return raised to the power of one plus i

7 Investment Forecast Incremental Cash Flow/Profit SRRR = 25% 8 Year 0 1 2 3 SNPV 9 ($400,000) $300,000 $300,000 $300,000 $185,600 10 11 Unfortunately, a year into the promotion, the operating expenses of the campaign were much higher than expected. 12 Sales were only $600,000 resulting in a net incremental cash flow/profit of only $150,000 in the first year. A similar 13 net cash flow is now forecast for year 2 and year 3. If you plug in $150,000 into C10, D10 and E10, the new projection is 14 a loss of $107,200 in shareholder value. Ouch! In addition, another $100,000 needs to be invested in the program! 15 16 Should we shoot the program? The answer seems to be obviously yes, but the correct answer is no. Why? Because at 17 the beginning of year 2, all past costs are sunk and common to whatever action you take next. You should not consider 18 the $400,000 and first year performance. All you should consider is the return from investing another $100,000, which is 19 $150,000 in Year 2 and 3. What is the shareholder NPV of this further investment of $100,000 at the beginning of year 2? 20 21 Investment Forecast Incremental Cash Flow/Profit SRRR = 25% 22 Year 2 3 SNPV 23 ($100,000) $150,000 $150,000 $116,000 24 Making the extra investment now will increase shareholder value by $116,000. This should be the basis for 25 your decision. Remember, do not include sunk costs and investments in making decisions! Only look forward! 26 Of course the shareholders did lose a bunch from the first decision. How much? This much: 27 28 Investment Forecast Incremental Cash Flow/Profit SRRR = 25% 29 Year 0 1 2 3 SNPV 30 ($400,000) $150,000 ($280,000)