What is the NPV?
Read the word document first. The word document includes all the information for the question. You can see this is a company’s four years project. You need to compute the NPV for this project at the end.
In the Excel document, “Input Area” summarizes the information for the word document. Use that information to fill in the blanks in “Output Area”. At the bottom of the output area is your answer for NPV
- You are working with a consumer product company on estimating the expected cash flows from a new brand of toothpaste that they plan to introduce. From your prior experiences with earlier introductions of similar products, you have collected the following information:
You are likely to sell 8 million tubes in the first year that you introduce the project, 10 million in the second year, 12 million in the third year and back down to 8 million in the fourth year. At the end of the fourth year, you will have to replace the brand with a new one.
You price toothpaste at $ 3 a tube currently, and expect to increase prices at 5% a year for the next 4 years.
You will have to advertise most heavily in the first year, spending $ 10 million on advertising, but you expect this to drop to $ 6 million in year 2, $ 4 million in year 3 and $ 2 million in year 4.
Your costs associated with producing the toothpaste are $ 0.50 a tube currently, and you expect this to increase at 5% a year for the next 4 years.
You will have to invest $ 10 million in new equipment at an old plant to create the manufacturing facilities and you expect to depreciate this expenditure straight line over the 4 years down to zero.
You have a 40% tax rate.
The firm’s weighted average cost of capital is 12%. This is the required return on the project.
