A Firm Is Trying to Determine Which of Two Products

question 52

Multiple Choice

A firm is trying to determine which of two products it should launch. Product A has an expected life of three years. It will bring in cash flows of $10,000 in each of the three years. Product B has an expected life of two years. It will bring in cash flows of $15,000 in each of the two years. Assume a discount rate of 8%. Which product should the firm, based on NPV alone, select?

• A) Product A
• B) Product B
• C) Product A and B are equivalent
• D) NPV for the products cannot be calculated with the information given.

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Definitions:

Allowance Method

The method of accounting for uncollectible receivables that recognizes an expense by estimating future uncollectible accounts at the end of the accounting period.

Small Companies

Businesses with a comparatively limited scale of operations, resources, or revenues, often defined within specific legal or industry frameworks.

Accounts Receivable

The amount customers have yet to pay a company for products or services that have already been provided or utilized.

Notes Receivable

A customer’s written promise to pay an amount and possibly interest at an agreed-upon rate; amounts that customers owe for which a formal, written instrument of credit has been issued.