Please include explainations to results. A company is trying to decide which of
ID: 2479450 • Letter: P
Question
Please include explainations to results.
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 tredicted revenue and cost data for each product line follows. 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?Explanation / Answer
Product A:Depreciation = 2500000/5 = 500000
Total contribution Units sales *selling price - variable cost
= (25000*30)- 15000-120000-30000 -500000
= 85000
After tax income = 85000 (1-.30) = 59500
Cash flow = 59500+500000= 559500
Present value of cash flow = 3.6048 * 559500 = 2016885.6
NPV = 2016885.6- 2500000 = - 483,114.4
Product B:Depreciation = 1500000/5 = 300000
Contribution = (20000*30)- 8000-80000-25000 - 300000
= 187000
After tax income = 187000*(1-.30)=130900
cash flow = 300000+130900 = 430900
Present value = 430900*3.6048= 1553308.32
NPV = 1553308.32 - 1500000 = 53308.32
Product A is not acceptable as NPV is negative and Product B is acceptable