EcoClean plans to introduce an environmentally friendly and pet-safe all-purpose cleaning solution. Because the chemical nature of the product is innovative, the product development and design phase will be extensive. The accountants have estimated three years of information for the product as follows:

After the first three years, production and sales are expected to maintain a consistent level that meets EcoClean return on investment requirements. No end-of-life costs are predicted. EcoClean has income from other products to offset any initial losses from the new product; however, the project has a required rate of return of 8%.

Required:

A. Determine the net present value (NPV) of the cash flows of the project over its estimated first three years of its life cycle. Ignore the effects of inflation.

B. Would you recommend that EcoClean undertake the project? Explain.

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Year 1 Year 2 Year 3 Units manufactured and sold Contribution margin per unit Fixed costs (including R&D) 800,000 5.00 2,400,000 5.00 $3,000,000 $2,500,000 $ 500,000