60.1K

Verified Solution

Link Copied!

Rennes Ltd is considering the launch of a new product. To date, 150,000 has been spent in research and development of this new product. If a decision is made to go ahead, new equipment costing 660,000 will be required immediately. The equipment will have an expected life of five years. Annual operating profits (losses) from the new product, which also has an expected life of five years, are expected to be as follows: The new equipment will be depreciated using the straight-line method and its estimated disposal value at the end of its useful life is 40,000. Additional working capital of 80,000 will be required immediately, which will be released at the end of the new product's life cycle. The cost of capital for the business is 6%. 1. Calculate the net present value of producing the new product. (Indicate negative NPV with a - sign) 2. Should the new product be launched? (Click here to view the net present value.) 1. Calculate the net present value of producing the new product. (Indicate negative NPV with a - sign) (Click here to view the data table.) The net present value of producing the new product is (Round your answer to the nearest pound.) The new product launched as the net present value is This will lead to a(n) in shareholder wealth. Operating profits (losses) Year 1 10,000 Year 2 16,000 Year 3 26,000 Year 4 20,000 Year 5 (30,000) Present value of 1 at 6% Immediately 1.000 Year 1 0.943 Year 2 0.890 Year 3 0.840 Year 4 0.792 Year 5 0.747

Answer & Explanation Solved by verified expert

See Answer