133.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:
Product A Product B
Unit sales25,00020,000
Unit sales price$30$30
Direct materials$15,000$8,000
Direct labor$120,000$80,000
Other cash operating expenses$30,000$25,000
New equipment costs$2,500,000$1,500,000
Estimated useful life (no salvage)5 years5 years
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?
134.A company is considering two alternative investment opportunities, each of which requires an initial cash outlay of $110,000. The expected net cash flows from the two projects follow:
Project AProject Z
Year 1$30,000$44,000
Year 244,00070,000
Year 3 70,000 30,000
Totals$144,000$144,000
Required:
(1) Based on a comparison of their net present values, and assuming the same discount rate (greater than zero) is required for both projects, which project is the better investment? (2) Use the table values below to find the net present value of the cash flows associated with Project A, discounted at 12%:
PeriodsPresent value of 1 at 12%
10.8929
20.7972
30.7118
135.A company has a decision to make between two investment alternatives. The company requires a 10% return on investment. Predicted data is provided below:
Investment AInvestment Z
Projected after-tax net income$40,000$42,000
Investment costs$600,000$675,000
Estimated life6 years6 years
The present value of an annuity for 6 years at 10% is 4.3553. This company uses straight-line depreciation.
Required:
(a) Calculate the net present value for each investment.
(b) Which investment should this company select? Explain.
(a)
136.A company is considering a 5-year project. It plans to invest $62,000 now and it forecasts cash flows for each year of $16,200. The company requires a hurdle rate of 12%. Calculate the internal rate of return to determine whether it should accept this project. Selected factors for a present value of an annuity of 1 for five years are shown below:
Interest ratePresent value of an annuity of 1 factor
10%3.7908
12%3.6048
14%3.4331