Purchase Solution

Net Present Value

Not what you're looking for?

Ask Custom Question

Could someone help me with the following problem. Thanks!
Please see the attached document.
These are the questions:

1) Using net present value computations and ignoring income taxes, analyze the one year and two year development alternatives. At this time, ignore the potential introduction of a comparable product by ACE's major competitor. Should either alternative be selected? If so, which would you recommend? ACE's cost of capital is 10 percent.
2) How would you modify your analysis in part (1) to address the potential introduction of a competing product by ACE's major competitor?

Purchase this Solution

Solution Preview

1) The first step is to establish your discount rate. Unless other information is provided, this is usually assumed to be the cost of capital. In this case, that is 10%.
<br>The next step is to find the net present value of the income for both scenarios. I did this in Excel, step-by-step for illustrative purposes, although you can just as easily do it all as one calculation using the NPV fuction. You would need to modify this slightly if the income was earned at the beginning of each year, or if it came in bits throughout the year, but the standard method for this type of problem is to assume that the income is earned at the end of the year.
<br>It is also important to examine what would happen if no changes were made. This is the first case I calculated--no introduction of model Z.
<br>Basic Scenario--Model X Only
<br>Year Income PV
<br>1 $400 $363.64
<br>2 $300 $247.93
<br>3 $200 $150.26
<br>4 $- $-
<br>5 $- $-
<br>Sum of PV income $761.83
<br>The first option for change, introducing model Z after one year of development, yielded the following results:
<br>Scenario 1--Introduce Z after one year
<br>Year Income PV
<br>1 $400 $363.64
<br>2 $500 $413.22
<br>3 $600 $450.79 ...

Purchase this Solution

Free BrainMass Quizzes
Team Development Strategies

This quiz will assess your knowledge of team-building processes, learning styles, and leadership methods. Team development is essential to creating and maintaining high performing teams.

Accounting: Statement of Cash flows

This quiz tests your knowledge of the components of the statements of cash flows and the methods used to determine cash flows.

MS Word 2010-Tricky Features

These questions are based on features of the previous word versions that were easy to figure out, but now seem more hidden to me.

Paradigms and Frameworks of Management Research

This quiz evaluates your understanding of the paradigm-based and epistimological frameworks of research. It is intended for advanced students.

Employee Orientation

Test your knowledge of employee orientation with this fun and informative quiz. This quiz is meant for beginner and advanced students as well as professionals already working in the HR field.