A Company is considering two alternative methods of producing a new product. The

Question

A Company is considering two alternative methods of producing a new product. The relevant data concerning the alternatives are presented below. Alternative I Alternative II Initial Investment $50,000 $110,000 Annual receipts $36,000 $50,000 Annual Disbursements $16,000 $10,000 Annual depreciation $12,000 $16,000 Expected Life 5 years 7 years Salvage Value $0 $0 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 11 percent. Calculate the Net Present Value of each alternative.

Explanation / Answer

alternate 1 irr = 12.3% alternate2 irr =14.6%

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