Adequate information: Rent = $75,000 Building modification for Product A = $115,000 Building modification for Product B = $160,000 Initial cash outlay for equipment (Equipment) for Product A = $340,000 Initial cash outlay for equipment (Equipment) for Product B = $345,000 Estimated useful life of Product A = 15 years Estimated useful life of Product B = 15 years Annual pretax cash revenue (Revenue) of Product A = $275,000 Annual pretax cash revenue (Revenue) of Product B = $295,000 Annual pretax expenditure (Expenditure) of Product A = $115,000 Annual pretax expenditure (Expenditure) of Product B = $130,000 Restoration cost of Product A = $75,000 Restoration cost of Product B = $85,000 Tax rate = 21%, 0.21 Required rate of return , r = 12% or 0.12 To recommend: The product that should be chosen by the company. Introduction: Net present value is defined as the summation of the present value of cash inflows in each period minus the summation of the present value of cash outflow . The decision criteria of net present value are that in the case of the mutually exclusive project, the project having the higher net present value should be selected.

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Chapter 6, Problem 38QAP

Summary Introduction

Adequate information:

Rent = $75,000

Building modification for Product A = $115,000

Building modification for Product B = $160,000

Initial cash outlay for equipment (Equipment) for Product A = $340,000

Initial cash outlay for equipment (Equipment) for Product B = $345,000

Estimated useful life of Product A = 15 years

Estimated useful life of Product B = 15 years

Annual pretax cash revenue (Revenue) of Product A = $275,000

Annual pretax cash revenue (Revenue) of Product B = $295,000

Annual pretax expenditure (Expenditure) of Product A = $115,000

Annual pretax expenditure (Expenditure) of Product B = $130,000

Restoration cost of Product A = $75,000

Restoration cost of Product B = $85,000

Tax rate = 21%, 0.21

Required rate of return, r = 12% or 0.12

To recommend: The product that should be chosen by the company.

Introduction: Net present value is defined as the summation of the present value of cash inflows in each period minus the summation of the present value of cash outflow.

The decision criteria of net present value are that in the case of the mutually exclusive project, the project having the higher net present value should be selected.

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