A Company Is Considering Two Alternative Methods of Producing a New

question 22

Essay

A company is considering two alternative methods of producing a new product.The relevant data concerning the alternatives are presented below. At the end of the useful life of whatever equipment is chosen the product will be discontinued.The company's tax rate is 50 percent and its cost of capital is 10 percent.
a.Calculate the net present value of each alternative.
b.Calculate the benefit cost ratio for each alternative.
c.Calculate the internal rate of return for each alternative.
d.If the company is not under capital rationing,which alternative should be chosen?
Why?

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Definitions:

Production Possibility Frontier

The Production Possibility Frontier (PPF) is a graphical representation that shows the maximum quantity of two goods or services that a society can produce, given fixed resources and technology, highlighting the trade-offs in production choices.

Labor Force

The total number of people, including both the employed and the unemployed, who are of working age and seeking employment.

Opportunity Cost

The value of the next best alternative that is foregone when making a choice.

Productive Resources

Factors used in the production of goods and services, which include labor, capital, and natural resources.