Financially wise to buy the publication rights

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Reference no: EM132252551

An ABC poll in the spring of 2007 found that one-third of students 12 – 17 admitted to cheating and the percentage increased as the students got older and felt more grade pressure. Would it be proper for a publishing company to offer a new book that outlines a variety of methods that could be used to improve and handle grade pressure. The company has a cost of capital of 8% and estimates it could sell 10,000 volumes by the end of year one and 5,000 volumes in each of the following two years. The immediate printing costs for the 20,000 volumes would be $20,000. The book would sell for $7.50 per copy and net the company a profit of $6 per copy after royalties, marketing costs and taxes. Year one net would be $60,000.

From a capital budgeting standpoint, is it financially wise to buy the publication rights? What is the NPV of this investment? The year 0 cash flow is -20,000, year 1 is 60,000, and years 2 and 3 are 30,000 each. Given a cost of capital of 8%, the NPV is just over $85,000. It looks good, right?

Reference no: EM132252551

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