Question
Suppose we are asked to decide whether or not a new product should be launched. It will cost about $5,000 at the beginning and $1,000
Suppose we are asked to decide whether or not a new product should be launched. It will cost about $5,000 at the beginning and $1,000 at the end of each year for production. We use a 6 percent discount rate to evaluate new products. Based on expected sales and costs, we expect that the cash flows over the five-year life of the project to be $1,200 in each of the first two years, $1,400 in each of the next two, and $1,800 in the last year. However, we suspect that a recession might happen in the future at the 20% probability which affects the cash flows of the projects as follows: $600 in each of the first two years, $700 in each of the next two, and $900 in the last year. Also, there is another possibility that one of our competitors leave the market with the probability of 10%. This will increase the base estimates of income cash flows by $300. To be very conservative, we take on this project only if the expected NPV is positive. Should we initiate the project? (1pt)
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