A company is contemplating to launch a new product. From the details provide below suggest if...

 

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A company is contemplating to launch a new product. From the details provide below suggest if the company should launch the product. Market research conducted £128,000 Initial investment (year 0) Production equipment Recruitment and training Advertising/promotion Working capital Projected sales revenues: Year 1 (£000s) 600 2 1000 3 1200 £000 1,000 100 10 190 4 1000 5 800 Additional information: . Cost of sales is 30% of sales value. • Fixed costs (all incremental) per annum - £100,000. • Depreciation of production equipment is 20% per annum on reducing balance with salvage value of £100,000 at the end of year 5. • The above products cash flows are at current year's (year 0) selling prices and costs. Inflation is expected to affect all cash flows at 5% year on year. • The production equipment qualifies for tax relief at 25% per annum on reducing balance. Assume that the corporation tax rate is 30% for the five years. The real cost of capital is 12% • Hint: exclude market research cost as it is sunk cost. A company is contemplating to launch a new product. From the details provide below suggest if the company should launch the product. Market research conducted £128,000 Initial investment (year 0) Production equipment Recruitment and training Advertising/promotion Working capital Projected sales revenues: Year 1 (£000s) 600 2 1000 3 1200 £000 1,000 100 10 190 4 1000 5 800 Additional information: . Cost of sales is 30% of sales value. • Fixed costs (all incremental) per annum - £100,000. • Depreciation of production equipment is 20% per annum on reducing balance with salvage value of £100,000 at the end of year 5. • The above products cash flows are at current year's (year 0) selling prices and costs. Inflation is expected to affect all cash flows at 5% year on year. • The production equipment qualifies for tax relief at 25% per annum on reducing balance. Assume that the corporation tax rate is 30% for the five years. The real cost of capital is 12% • Hint: exclude market research cost as it is sunk cost.

Answer rating: 100% (QA)

To determine whether the company should launch the new product we will calculate the net present value NPV of the project The NPV represents the present value of the expected cash flows from the proje... View the full answer