My answer is below, marked wrong without explanation. I'm not quite sure what I did wrong, the math is sound. Perhaps I'm interpreting the question wrong?
Although gelato has lower fat content than ice cream it still contains a high level of saturated fat. A diet that is high in saturated fat can lead to health problems. GROM would like to reduce the fat level of its gelato without compromising the taste. GROM believes that if it makes a onetime investment of $375,000 in research and development, it should be able to reduce the fat content. GROM’s market research indicates that this improvement will increase yearly sales by 67,000 pints in the New York area. You have been asked to recommend whether GROM should invest in the R&D for the lower fat gelato. Please make an investment recommendation, based on the net present value of this investment to GROM, your recommendation should also state the critical sales increase (in yearly sales of pints), attributable to the product improvement, that makes the investment a sound decision. Show all calculations and explain the reasoning for your recommendation.
Use a three year time horizon to calculate the net present value, starting with the present. Use a 12% annual discount rate. For simplicity, you may assume that GROM receives all of its revenues for sales in a year at the end of the year in which they occur (even though, in actuality, these revenues are spread throughout the year). Thus, you may assume that the first year’s revenues are received 1 year from now, the second year’s revenues 2 years from now, and the third year’s 3 years from now. Use the profit margins that you calculated in Question 1. Do not use the profit figures with the price promotion. For simplicity, you may ignore the impact that the healthier GROM would have on sales in other markets.
MY ANSWER
Initial fixed cost: $375,000
Year 1 = $67,000*(1/(1+[12/100])^1)= 67000*(1/1.12) = 59821.43
Year 2 = $67,000*(1/(1+[12/100])^2)= 67000*(1/1.2544) = 53411.99
Year 3 = $67,000*(1/(1+[12/100])^3)= 67000*(1/1.404928) = 47689.28
The total net present value to GROM of lower fat gelato R&D is a loss of
-$375,000 + $59,821.43 + $53,411.99 + $47,689.28 = -$214,077.30
