Comparing Investment Criteria Consider two mutually exclusive new product launch projects that Nagano Golf is considering. Assume the discount rate for both products is 15 percent.
Project A: Nagano NP-30. Professional clubs that will take an initial investment of $660,000 at Time 0. Next five years (Years 1–5) of sales will generate a consistent cash flow of $222,000 per year. Introduction of new product at Year 6 will terminate further cash flows from this project.
Project B: Nagano NX-20.
High-end amateur clubs that will take an initial investment of
$420,000 at Time 0.
Cash flow at Year 1 is $120,000. In each subsequent year cash flow
will grow at 10 percent per year.
Introduction of new product at Year 6 will terminate further cash
flows from this project.
Year NP-30 NX-20
0 −$660,000 −$420,000
1 222,000 120,000
2 222,000 132,000
3 222,000 145,200
4 222,000 159,720
5 222,000 175,692