Problem: 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 |
|
Prosuct B |
| Unit Sales |
|
$25,000 |
|
20,000 |
| Unit Sales Price |
|
$30 |
|
$30 |
|
|
|
|
|
|
| Diderct Materials |
|
$15,000 |
|
$8,000 |
| Direct Labor |
|
$120,000 |
|
$80,000 |
| Other cash Operating expenses |
$30,000 |
|
$25,000 |
|
|
|
|
|
|
|
|
|
|
|
|
| New Euipment Costs |
$2,500,000 |
|
$1,500,000 |
| Estimated Usefull 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?