A small manufacturer of camping gear is considering a new product that would expand its market. The product is a portable “hoophouse” that would allow people to begin planting gardens earlier in the season by trapping heat and keeping frost at bay. It would use existing technology but would be a very different product line. The required analyses are simple net present value (NPV) and internal rate of return (IRR) calculations. However, through the lens of managers in the business, this case can generate a rich discussion of the role of NPV analysis, the differences between NPV and IRR decision rules, and the economic meaning of analysis.
The case is intentionally simplified to focus student attention on the basic methods of calculating cash flow and the essential meaning of an NPV. It can also be easily expanded to include other topics. For example, by providing information on a potential salvage value, one can explore salvage value impacts.
