Cranjet Industries is expanding its product line and its production capacity. Th

Question

Cranjet Industries is expanding its product line and its production capacity. The costs and expected cash flows of the two independent projects are given in the following table. The firm uses a discount rate of 14.60 percent for such projects.

a. What are the NPVs of the two projects?

NPV of product line expansion is______________________

NPV of production capacity expansion is_________________________

b. Should both projects be accepted? or either? or neither?

Please Show your work.

Year Product Line Expansion Production Capacity Expansion 0 -$2,592,200 -$9,872,700 1 503,500 1,905,600 2 746,200 1,905,600 3 761,400 1,905,600 4 899,100 2,587,800 5 696,400 2,849,500

Explanation / Answer

NPV – Product Line Expansion:
=> -$2,592,200 + [($503,500)/(1.1460)] + [($746,200)/(1.1460)2] + [($761,400)/(1.1460)3] + [($899,100)/(1.1460)4] + [($696,400)/(1.1460)5] = -$205,175.39

NPV – Product Capacity Expansion:
=> -$9,872,700 + [($1,905,600)/(1.1460)] + [($1,905,600)/(1.1460)2] + [($1,905,600)/(1.1460)3] + [($2,587,800)/(1.1460)4] + [($2,849,500)/(1.1460)5] = -$2,550,808.88

None of the projects should be selected as the NPV is negative for both projects.

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---