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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 sales	25,000	20,000
Unit sales price	30	30

Direct materials	15,000	8,000
Direct labor	120,000	80,000
Other cash expenses	30,000	25,000

New equipment costs	2,500,000	1,500,000
Estimated useful life (no salvage)	5 years	5 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?

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Accounting Basics, Accounting

Category:- Accounting Basics
Reference No.:- M9795879

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