Apple Inc. is considering discontinuing its Model A brand of computers for a newer model which will sell for the next three years. The cost of developing this new model is $2,000,000 (including new machinery) and the company estimates that machinery from this project will have a scrap value of $100,000 at the end of the three years. The company expects to sell 500,000 units in the first year with sales volume experiencing a 10% growth per annum. Each unit will sell for $3,000 and is expected to have a unit cost of $1,000. The company expects marketing costs for its new model computers to be $1,000,000 per year. By discontinuing its Model A brand, Apple Inc. will forgo annual sales of $10,000.
1. What is the Net Present Value of the Project if the firm has a cost of capital of 12%?
2. Should Apple Inc. pursue this project?
3. What will happen to Apple Inc.’s share price if it were to pursue this project?