Super-duper Inc. has recently completed test marketing of a new vanilla frozen dessert. The test marketing cost $40,000. Based on the test market results, the company feels that an immediate $100,000 investment in equipment would yield a $15,000 after-tax net cash flow each year forever, the first cash flow received one year from today. The appropriate discount rate for the dessert project is 12%. Alternatively, the company could sell the test market results to Gell-O Inc. for $50,000, yielding a profit of $50,000 - $40,000 = $10,000 on the test market expense. Of course, selling the test market results to Gell-O contractually prohibits Super-duper from producing the dessert itself. What should Super-duper do? Support your decision.
5. Super-duper Inc. has recently completed test marketing of a new vanilla frozen dessert. The test marketing cost $40,000. Based on the test market results, the company feels that an immediate $100,000 investment in equipment would yield a $15,000 after-tax net cash flow each year forever, the first cash flow received one year from today. The appropriate discount rate for the dessert project is 12%. Alternatively, the company could sell the test market results to Gell-O Inc. for $50,000, yielding a profit of $50,000 - $40,000 = $10,000 on the test market expense. Of course, selling the test market results to Gell-O contractually prohibits Super-duper from producing the dessert itself. What should Super-duper do? Support your decision.
Given information :
Sunk cost = $40,000
Investment needed = $100,000
Perpetual cash flows = $15,000
Discount rate = 12%
Selling price of test results = $50,000
Present value of the project when test results are sold :
Present value of project = Present value of Expected cash inflows - Present value of Invested cash outflows
Present value of project = $50,0000 - $40,000
= $10,000
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