A Company Is Trying to Decide Which of Two New

question 150

Essay

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

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Definitions:

Selye's Concept

Pertains to the General Adaptation Syndrome, a theory by Hans Selye that describes the body's short-term and long-term reactions to stress.

Stress

A condition of mental or emotional strain resulting from adverse or demanding circumstances.

Lifelong Poverty

A state of living in poverty for a significant portion or the entirety of an individual's life, often resulting in chronic hardships.

Adrenal Gland

An endocrine gland above the kidney that produces hormones such as adrenaline and cortisol, involved in the body's stress response.