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:

Elastic

Describes a situation where the demand for a good or service significantly changes in response to price changes, indicating sensitivity to price.

Midpoint Method

is a technique in economics used to calculate the elasticity of demand or supply, providing a more accurate measure by averaging the starting and ending points.

Elasticity of Demand

A measure of how sensitive the demand for a good or service is to changes in its price.

Quantity Demanded

The complete amount of a product or service that purchasers have the willingness and capacity to obtain at a set price.