Allisons Dresswear Manufacturers is preparing a strategy for

Allison’s Dresswear Manufacturers is preparing a strategy for the fall season. One alternative is to expand its traditional ensemble of wool sweaters. A second option would be to enter the cashmere sweater market with a new line of high-quality designer label products. The marketing department has determined that the wool and cashmere sweater lines offer the following probability of outcomes and related cash flows.
  

Expand Wool
Sweaters Line

Enter Cashmere
Sweaters Line

The initial cost to expand the wool sweater line is $129,000. To enter the cashmere sweater line, the initial cost in designs, inventory, and equipment is $145,000.
  
a. Calculate net present value if, Allison’s Dresswear Manufacturers decides to: (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to the nearest whole dollar.)
  

	Expand Wool Sweaters Line		Enter Cashmere Sweaters Line
Expected Sales	Probability	Present Value of Cash Flows from Sales		Probability	Present Value of Cash Flows from Sales
Fantastic		.2		$	240,000				.5		$	344,000
Moderate		.5			133,000				.3			259,000
Low		.3			86,100				.2			0

Solution

Expected Net Present Value [NPV] - Expand Wool Sweaters Line

Present Value

of Cash Flows

from Sales

Initial Cost

Net present Value

Probability

Expected Net Present Value

[NPV]

Fantastic

2,40,000

1,29,000

1,11,000

0.20

22,200

Moderate

1,33,000

1,29,000

4,000

0.50

2,000

Low

86,100

1,29,000

-42,900

0.30

-12,870

Expected Net Present Value [NPV]

$11,330

Expected Net Present Value [NPV] – Enter Cashmere Sweaters Line

Present Value

of Cash Flows

from Sales

Initial Cost

Net present Value

Probability

Expected Net Present Value

[NPV]

Fantastic

3,44,000

1,45,000

1,99,000

0.50

99,500

Moderate

2,59,000

1,45,000

1,14,000

0.30

34,200

Low

-

1,45,000

-1,45,000

0.20

-29,000

Expected Net Present Value [NPV]

$ 104,700

Net present value if, Allison’s Dresswear Manufacturers decides to Expand Wool Sweaters Line = $11,330

Net present value if, Allison’s Dresswear Manufacturers decides to Enter Cashmere Sweaters Line = $104,700

	Present Value of Cash Flows from Sales	Initial Cost	Net present Value	Probability	Expected Net Present Value [NPV]
Fantastic	2,40,000	1,29,000	1,11,000	0.20	22,200
Moderate	1,33,000	1,29,000	4,000	0.50	2,000
Low	86,100	1,29,000	-42,900	0.30	-12,870
Expected Net Present Value [NPV]	$11,330