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:
$\begin{array} { l rr }
&\underline{\text { Product A }} & \underline{ \text { Product B } }\
\text {Unit sales}&25,000&20,000 \
\text {Unit sales price}&\$ 30 &\$ 30 \
\text {Direct materials}&\$15,000&\$ 8,000\
\text {Direct labor}&\$120,000 &\$ 80,000\
\text {Other cash operating expenses}&\$ 30,000&\$ 25,000\
\text {New equipment costs}&\$2,500,000 &\$ 1,500,000\
\text {Estimated useful life (no salvage)}&5 \text { years }&5 \text { years }
\end{array}$

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?

Question

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:
 $\begin{array} { l rr }  
&\underline{\text { Product A }} & \underline{ \text { Product B } }\
\text {Unit sales}&25,000&20,000 \
\text {Unit sales price}&\$ 30 &\$ 30 \
\text {Direct materials}&\$15,000&\$  8,000\
\text {Direct labor}&\$120,000 &\$  80,000\
\text {Other cash operating expenses}&\$ 30,000&\$ 25,000\
\text {New equipment costs}&\$2,500,000 &\$ 1,500,000\
\text {Estimated useful life (no salvage)}&5 \text { years }&5 \text { years }
\end{array}$
 
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?

Quizplus · Accepted Answer

The Answer of 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:
 $\begin{array} { l rr }  
&\underline{\text { Product A }} & \underline{ \text { Product B } }\
\text {Unit sales}&25,000&20,000 \
\text {Unit sales price}&\$ 30 &\$ 30 \
\text {Direct materials}&\$15,000&\$  8,000\
\text {Direct labor}&\$120,000 &\$  80,000\
\text {Other cash operating expenses}&\$ 30,000&\$ 25,000\
\text {New equipment costs}&\$2,500,000 &\$ 1,500,000\
\text {Estimated useful life (no salvage)}&5 \text { years }&5 \text { years }
\end{array}$
 
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?

A Company Is Trying to Decide Which of Two New