Introducing new fitness watch to the market

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A technology company is planning on introducing a new fitness watch to the market. The company is deciding between the following two options:

Option 1: Rush the fitness watch to market by paying overtime and speeding up testing. The company will pay $5 million initially and will receive $3 million in annual profit from the watch during the first year. During years 2 through 4, the annual profit from the watch will decrease by $500,000 from the previous year. The watch will be obsolete by year 5 so the profit in year 5 and beyond is $0.

Option 2: Move more slowly in getting the watch to market. In this option, the company pays $1 million initially and $1 million in the first year. Since the watch is introduced to the market later than with option 1, the company will earn less revenue with option 2. The company will earn an annual profit of $2.25 million in year 2. In years 3 and 4, the annual profit from the watch will decrease by $500,000 from the previous year. The watch will still be obsolete by year 5 so the profit in year 5 and beyond is $0.

Using rate of return analysis, what does the company’s MARR need to be in order to choose option 2 versus option 1?

Reference no: EM131007281

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