Internal rates of return , Basic Statistics

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A consumer product firm finds that its brand of laundry detergent is losing market share, so it decides that it needs to "freshen" the product. One strategy is to maintain the current detergent formula but to repackage the product. The other strategy involves a complete reformulation of the product in a way that will appeal to environmentally conscious consumers. The firm will pursue one strategy or the other but not both. Cash flows from each proposal appear below, and the firm discounts cash flows at 13%.

Year

Repackage

Reformulate

0

- $3,000,000

- $25,000,000

1

2,000,0000

10,000,000

2

1,250,000

9,000,000

3

500,000

7,000,000

4

250,000

4,000,000

5

250,000

3,500,000

 

(a)   What strategy will you plan to take an appropriate decision?

(b)   Rank these investments based on their pay back periods.

(c)    Rank these investments based on their net present values (NPVs).

(d)   Rank these investments based on their internal rates of return (IRR).

(e)   Do these investment rankings yield mixed signals?


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