A new product will cost $750,000 to design, test prototypes, and set up for production. Net revenue the first year is projected to be $225,000. Marketing is unsure whether future year revenues will (a) increase by $25,000 per year as the product’s advantages become more widely known or (b) decrease by 10% per year due to competition. A third pattern of increasing by $25,000 for one year and then decreasing by 10% per year has been suggested as being more realistic. The firm evaluates projects with a 12% interest rate, and it believes that this product will have a 5-year life. Calculate the present worth and rate of return for each scenario.
A new product will cost $750,000 to design, test prototypes, and set up for production. Net revenue the first year is projected to be $225,000. Marketing is unsure whether future year revenues will (a) increase by $25,000 per year as the product’s advantages become more widely known or (b) decrease by 10% per year due to competition. A third pattern of increasing by $25,000 for one year and then decreasing by 10% per year has been suggested as being more realistic. The firm evaluates projects with a 12% interest rate, and it believes that this product will have a 5-year life. Calculate the present worth and rate of return for each scenario.
Chapter9: Capital Budgeting And Cash Flow Analysis
Section: Chapter Questions
Problem 22P
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A new product will cost $750,000 to design, test prototypes, and set up for production. Net revenue the first year is projected to be $225,000. Marketing is unsure whether future year revenues will (a) increase by $25,000 per year as the product’s advantages become more widely known or (b) decrease by 10% per year due to competition. A third pattern of increasing by $25,000 for one year and then decreasing by 10% per year has been suggested as being more realistic. The firm evaluates projects with a 12% interest rate, and it believes that this product will have a 5-year life. Calculate the present worth and
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