A Company Is Considering Two Alternative Methods of Producing a New

question 6

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:

Rush Orders

Orders that are given priority over others, typically requiring faster production and delivery times at potentially higher costs.

Uneconomical Lot-Sizes

Lot-sizes that do not maximize efficiency or cost-effectiveness in production or ordering.

Service Company

A business entity that provides intangible products or services to customers rather than physical goods.

Fixed And Variable Cost

Fixed and Variable Cost are two types of costs incurred by businesses; fixed costs do not change with the level of production or service, while variable costs vary directly with the level of production or service.