A company is trying to decide which of two new product lines to introduce in the coming year. The company requires a 12% return on investment. The predicted revenue and cost data for each product line follows:
|
Product a |
Product B |
| Unit sales |
25,000 |
20,000 |
| Unit sales price |
30 |
30 |
|
|
|
| Direct materials |
15,000 |
8,000 |
| Direct labor |
120,000 |
80,000 |
| Other cash expenses |
30,000 |
25,000 |
|
|
|
| New equipment costs |
2,500,000 |
1,500,000 |
| Estimated useful life (no salvage) |
5 years |
5 years |
The company has a 30% tax rate and it uses the straight-line depreciation method. The present value of an annuity of 1 for 5 years at 12% is 3.6048. Compute the net present value for each piece of equipment under each of the two product lines. Which, if either of these two investments is acceptable?