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

ID: 2708728 • Letter: A

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.

Answer                      

$4,276 ;  $11,123

$9,136 ; $21,936

$13,236 ; $22, 577

$913.60 ; $2,193.60


Calculate the internal rate of return for each alternative. Answer            


Of the two Alternatives from questions one and two, which Alternative should the company chose?

Both

Neither

       

                            a.           

$4,276 ;  $11,123

                            b.           

$9,136 ; $21,936

                            c.           

$13,236 ; $22, 577

                            d.           

$913.60 ; $2,193.60

Explanation / Answer

Net Present Value of each alternative=

c. $13,236 ; $22, 577

as NPV are positive accept the project   

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