National Book and Periodical Sales (NBPS) is considering a proposal to offer a proprietary electronic book reader. They have hired a company to develop and produce a product in 2010 at a cost of $1.5 million which will be depreciated straight line over 5 years. The reader would sell for $200 each which is the cost of producing and selling them (no profit). The reader is expected to sell $50 million worth of electronic books in 2011 and increase by 25% every year for five years and then new technology would make these obsolete. Printed books sales in 2010 will be $500 million and are expected to decline by 10% a year starting in 2011. The COGS for electronic books is 40% of revenues as compared to 60% for printed books. No change in working capital is expected.
If the rate used for NBPS investment proposals is 5% and the tax rate is 35%, determine the Net Present Value of the Electronic Book project and indicate whether the project should be implemented.
The expert examines the net present value for periodical sales.