Question

StarQuest plans to introduce a new entertainment package and estimates immediate sales of $300 million. However, due to production conflicts, the product launch may be delayed two years, allowing competition to reduce sales by 10 percent. Using a 6 percent opportunity cost, determine the cost of the delay

Answer 1

The cost of two years' delay is $59.70 million

Step-by-step explanation:

The cost of delay is difference between the sales that ought to have been made if there was no delay and the present of sales when sales is delayed.

If there was no delay $300 million would have been made.

The present value of sales when delayed two years is given by the formula below:

pv=fv/(1+r)^n

fv future sales price of $300m *90%(the effect of 10% reduction in sales)

r rate is the opportunity of investing at 6%

n is the number of years of delay, which is 2 years

PV=($300*90%)/(1+0.06)^2=$240.30 million

The cost of delay =$300m-$240.30m

=$59.70m