Question

William's Co. is considering spending $15,000 at Time 0 to test a new product. Depending on the test results, the firm may decide to spend $58,000 at Time 1 to start production of the product. If the product is introduced and it is successful, it will produce aftertax cash flows of $45,000 a year for Years 2 through 4. The probability of successful test and investment is 62 percent. What is the net present value at Time 0 given a 14 percent discount rate

Answer 1

$10,275.03

Step-by-step explanation:

Years 0 1 2 3 4

Cash flow -15000 -58000 45000 45000 45000

Successful chance result (62%) -9300 -35960 27900 27900 27900

Considered cash flow -15000 -35960 27900 27900 27900

Discount factor (14%) 1 0.877 0.769 0.675 0.592

Present value -15000 (31,543.86) 21,468.14 18,831.71 16,519.04

Net present value = -$15000 - $31,543.86 + 21,468.14 + 18,831.71 + 16,519.04

Net present value = $10,275.03