Calculating cash flows and NPV for launch of new device

Question 1
PLI produces unusual gifts targeted at wealthy consumers. The company is analyzing the possibility of introducing a new device designed to attach to the collar of a cat or dog. This device emits sonic waves that neutralize airplane engine noise, so that pets traveling with their owners will enjoy a more peaceful ride. PLI believes that developing this project will require up-front capital expenditure of $10 M. These costs will be depreciated on a straight-line basis for 5 years.
PLI believes that it can sell the product initially for $250. The selling price will increase to $260 in years 2 and 3 before falling to $245 and $240 in years 4 and 5, respectively. After 5 years the company will withdraw the product from the market and replace it with something else. Variable costs are $135 per unit. PLI forecasts sales volume of 20,000 units per year, with increase of 25% in year 2, 20% in year 3, 20% in year 4 and 15% in year 5. Offering this product will force PLI to make additional investments in receivables and inventory. Projected end-of-year balances appear in the attached table.

The firm faces a tax rate of 34%. Assume that cash flows arrive at the end of each year, except for the initial $10 M outlay.

a) Compute the projects cash flows each year.

b) Compute two NPVs one using 10% discount rate and one using 15%.

c) A PLI financial analyst reasons as follows: "With the exception of the initial outlay, the cash flows of this project arrive in more or less a continuous stream rather than at the end of each year. Therefore, by discounting each year's cash flows flow for a full year, we are underestimating the true NPV. A better approximation is to move the discounting 6 months forward - i.e. discount the year-1 cash flow for 6 months, year-2 cash flow for 1.5 years, and so on - this assumption implies that cash flows take place in the middle of the year instead of at the end of the year." Re-compute the NPVs. Does it make any difference? Explain.

1. The cash flows are in the attached file. The profits are calculated by subtracting the Variable Cost from the Selling Price and multiplying by the number of units. The number of units is increased as per the % change and the ...

Solution Summary

The solution explains how to calculate the NPV and cash flows for the introduction of a new device.

For the cashflows in the previous below, what is he NPV at a discount rate of zero percent? What If the discount rate is 10 percent? If it is 20 percent? If it is 30 percent?
Year Cash Flow
0 -$18,000
1 9,800
2 7,500
3 7,300

The McGregor Whiskey Company is proposing to market diet scotch. The product will be test-marketed for 2 years in Southern California at an initial cost of $500,000. This test launch is not expected to produce any profits but should reveal consumer preferences. There is a 60 percent chance that demand will be satisfactory. In th

Sorenson Stores is considering a project that has the following cashflows:
Year Cash Flow
0 CF0 = ?
1 $2,000
2 3,000
3 3,000
4 1,500
The project has a payback of 2.5 years, and the firm's cost of capital is 12%. What is the project's NPV?
a. $577.68
b. $765.91
c. $1,049.80
d. $2,761.32

1. Rappaport Enterprises is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that a project's projected NPV can be negative, in which case it will be rejected.
WACC:
10.00%
Year:0 1 2 3 4
Cashflows:-$1,000 $400 $405 $410 $415

A machine costs $380,000 and is expected to produce the following cashflows:
Year 1 2 3 4 5 6 7 8 9 10
CashFlows (000s) $50 $57 $75 $80 $85 $92 $92 $80 $68 $50
If the cost of capital is 12 perc

As an alternative to a lease, William and Bart Co. decided to buy a piece of equipment for $250,000, with a useful life of 10 years. Afterwards it can be sold for $20,000. Using the three year MACRS method for depreciation and William and Bart Co estimates cost of capital @ 12% and a tax rate of 20%.
How do determine the net

Question -For independent projects, is it true that if PI>0, then NPV>0, and IRR>K?
Is my answer correct?
PI= (I+NPV) / I where I=Investment
if PI>0 then {(I+NPV) / I}>0 which means NPV> -I meaning NPV>0 where <0>
is the limit of I
NPV=0={C1 / (1+IRR)}-I={C1 / (1+k)}-I where C1 is the expected future net
cash flo

ABC, organization is thinking of launching a new product. The company expects to sell $950,000 of the new product in the first year and $1,500,000 each year thereafter. Direct costs including labor and materials will be 55% of sales. Indirect incremental costs are estimated at $80,000 a year. The project requires a new plant

A company is looking to add a new machine at a cost of $4,133,250. The company expects this equipment will lead to cashflows of $817,322, $863,275, $937,250, $1,018,610, $1,212,960, and $1,225,000 over the next six years. If the appropriate discount rate is 15 percent, what is the NPV of this investment?