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 percent.
|
Year
|
Repackage
|
Reformulate
|
|
0
|
-$ 3,000,000
|
-$ 25,000,000
|
|
1
|
2,000,000
|
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. Rank these investments based on their NPVs.
b. Rank these investments based on their IRRs.
c. Rank these investments based on their PIs.
d. Draw NPV profiles for the two projects on the same set of axes and discuss these profiles.
e. Do these investment rankings yield mixed signals?