Whan lid ia an importer of novelty products. The directors are considering whether to introduce a new product, expected to beve a very shors economic life. Two alternative methods of promoting the new product are available, detalis of which ate a follewt Ahotative 1 would involve heavy initial adverriting and the employmeat of a large number of agents. The directors expeet that in immotiate cahh outflow of 100000 would be requited (the cont of advertising) which would prodace a net cah inflow after ane yar of $255000. Agens' commistion, amounting to E157500, would have to be paid at the end of two years. Niernatve 2 would involve a lower outiny an advertiaing (E50000, payable immediately), and no uve of agents. It would produce met cash infiom of zero after one year and f42000 at thit end of each of the mbsequent two yeats. Mr Court, a director of Khan Lad, commenta, 'I genenally favour the paybick method for choosing berween investment alemaitiva aach as these. Hewever, I am worried that the advertising expenditure under the second alternative will reduce our ipporind proft aec year by an emouot not compensated by any net revenves from sale of the product in that year. For that mien I do aot dhink we should even coasjder the second aleemative.' The cour of capinal of Jhan Led is 20 per cent per annum. The directon do not expect capital or any other resource to be in thort mpply during the next thine yearn. You are required to: (4) calsilate the net present values and estimate the internal rates of return of the two methods of promoting the new produet (10 matke) (6) adviar the ditectons of Khan Lod which, If either, method of promotion they should adopt, explaining the reavons for your advice and noting any additional information you think would be helpful in making the decision: (d) cominent on the vicwa expreased by Mr Courh. Lenter rastion. fith new puodict. Irailita Duther i-foenetion Atstunat morthanien (f4 maxirit) Rnecirabi Whan lid ia an importer of novelty products. The directors are considering whether to introduce a new product, expected to beve a very shors economic life. Two alternative methods of promoting the new product are available, detalis of which ate a follewt Ahotative 1 would involve heavy initial adverriting and the employmeat of a large number of agents. The directors expeet that in immotiate cahh outflow of 100000 would be requited (the cont of advertising) which would prodace a net cah inflow after ane yar of $255000. Agens' commistion, amounting to E157500, would have to be paid at the end of two years. Niernatve 2 would involve a lower outiny an advertiaing (E50000, payable immediately), and no uve of agents. It would produce met cash infiom of zero after one year and f42000 at thit end of each of the mbsequent two yeats. Mr Court, a director of Khan Lad, commenta, 'I genenally favour the paybick method for choosing berween investment alemaitiva aach as these. Hewever, I am worried that the advertising expenditure under the second alternative will reduce our ipporind proft aec year by an emouot not compensated by any net revenves from sale of the product in that year. For that mien I do aot dhink we should even coasjder the second aleemative.' The cour of capinal of Jhan Led is 20 per cent per annum. The directon do not expect capital or any other resource to be in thort mpply during the next thine yearn. You are required to: (4) calsilate the net present values and estimate the internal rates of return of the two methods of promoting the new produet (10 matke) (6) adviar the ditectons of Khan Lod which, If either, method of promotion they should adopt, explaining the reavons for your advice and noting any additional information you think would be helpful in making the decision: (d) cominent on the vicwa expreased by Mr Courh. Lenter rastion. fith new puodict. Irailita Duther i-foenetion Atstunat morthanien (f4 maxirit) Rnecirabi
