Estimate annual net cash flow

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You are evaluating two possible projects for your company, both of which involve the development of a new kind of computer mouse. The projects are mutually exclusive. Both projects require an initial investment of $120 million to be made immediately. The project is to last for 5 years, and initial investment will be fully depreciated over the life of the project. The sales will begin in the 2nd year, and this is where the two projects differ. Version A, which is more innovative, is expected to have sales in year 2 of $40 million and the operating cost is the 30% of total sales. The sale is expected increase 6% annually for the follow up period. Version B, which is less innovative but cheaper to produce, is expected to have the same sales in year 2, but the sales for version B are expected to increase only 4% annually for similar period. The cost of capital for both projects is 12% and assume that there is no tax.

(a) Estimate annual net cash flow

(b) Calculate NPV of the projects

(c) Which is the better project based on NPV

Reference no: EM133060068

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