Product A

This product will take 2 years to develop, at a cost of $100,000 in the first year (Yr 0) and $50,000 in the second. Revenue (benefits) in subsequent years is expected to be $100,000 per year.

Product B
This product will only take a year (Yr 0) to develop, at a cost of $120,000. Revenue (benefits) in subsequent years in expected to be $60,000 per year.
Assuming the company uses a 5-year planning horizon, which product should Megasoft initiate a project to develop?

Year 0 Year 1 Year 2 Year 3 Year 4 Total

Product A
Costs
Benefits
Cash Flow
Discount factor 1.00 0.83 0.69 0.58 0.48
DB - DC NPV
Product B
Costs
Benefits
Cash Flow
Discount factor 1.0 0.83 0.69 0.58 0.48
DB - DC
NPV

To determine which product Megasoft should initiate a project to develop, we need to calculate the Net Present Value (NPV) for both Product A and Product B.

Net Present Value (NPV) is a financial metric used to evaluate the profitability of an investment by comparing the present value of its expected cash flows to the initial investment cost.

For each product, we need to calculate the cash flows for each year, discount them to their present values, and then subtract the initial investment cost to obtain the NPV.

Let's calculate the NPV for each product:

Product A:
Year 0: Initial Investment Cost = -$100,000
Year 1: Cash Flow = $100,000
Year 2: Cash Flow = $100,000

Using the provided discount factors, we can calculate the present value for each year's cash flow:
Year 0: Present Value = -$100,000 * 1.00 = -$100,000
Year 1: Present Value = $100,000 * 0.83 = $83,000
Year 2: Present Value = $100,000 * 0.69 = $69,000

Now, calculate the NPV by subtracting the initial investment cost from the sum of the discounted cash flows:
NPV(A) = Present Value Year 1 + Present Value Year 2 - Initial Investment Cost
NPV(A) = $83,000 + $69,000 - $100,000
NPV(A) = $52,000

Product B:
Year 0: Initial Investment Cost = -$120,000
Year 1: Cash Flow = $60,000

Using the provided discount factors, we can calculate the present value for each year's cash flow:
Year 0: Present Value = -$120,000 * 1.00 = -$120,000
Year 1: Present Value = $60,000 * 0.83 = $49,800

Now, calculate the NPV by subtracting the initial investment cost from the sum of the discounted cash flows:
NPV(B) = Present Value Year 1 - Initial Investment Cost
NPV(B) = $49,800 - $120,000
NPV(B) = -$70,200

Comparing the NPVs, we can see that NPV(A) is positive ($52,000) while NPV(B) is negative (-$70,200). This indicates that Product A has a higher expected profitability than Product B.

Therefore, based on the Net Present Value analysis, Megasoft should initiate a project to develop Product A.

To determine which product Megasoft should initiate a project to develop, we need to compare the net present value (NPV) of each product over the 5-year planning horizon.

Let's calculate the NPV for each product:

Product A:
Year 0: Costs = -$100,000
Year 1: Costs = -$50,000
Year 2: Benefits = $100,000
Year 3: Benefits = $100,000
Year 4: Benefits = $100,000

Discount factor (DF) for each year:
Year 0: DF = 1.00
Year 1: DF = 0.83
Year 2: DF = 0.69
Year 3: DF = 0.58
Year 4: DF = 0.48

NPV = (Benefits * DF) - (Costs * DF)

NPV = (100,000 * 0.69) + (100,000 * 0.58) + (100,000 * 0.48) - (100,000 * 1.00) - (50,000 * 0.83)

Product A's NPV = $134,000 - $83,500 = $50,500

Product B:
Year 0: Costs = -$120,000
Year 1: Benefits = $60,000
Year 2: Benefits = $60,000
Year 3: Benefits = $60,000
Year 4: Benefits = $60,000

NPV = (Benefits * DF) - (Costs * DF)

NPV = (60,000 * 0.83) + (60,000 * 0.69) + (60,000 * 0.58) + (60,000 * 0.48) - (120,000 * 1.00)

Product B's NPV = $202,800 - $120,000 = $82,800

Based on the calculation, Product B has a higher net present value (NPV) of $82,800 compared to Product A's NPV of $50,500. Therefore, Megasoft should initiate a project to develop Product B.