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.

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

Thanks for anyone's help,

Cheers,

Cabbage~

a.

$4,276 ; $11,123

b.

$9,136 ; $21,936

c.

$13,236 ; $22, 577

d.

$913.60 ; $2,193.60

Calculate the internal rate of return for each alternative. Answer

a. 7% ; 9% b. 22% ; 32% c. 18% ; 17% d. 1.8% ; 1.7%

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

Answer a. Alternative I b. Alternative II c.

Both

d.

Neither

Explanation / Answer

$9,136 ; $21,936

Calculate the internal rate of return for each alternative. Answer

Alternative I

For IRR, NPV =0

-50,000 + 16000/(1+r) + 16000/(1+r)^2 + 16000/(1+r)^3 + 16000/(1+r)^4 + 16000/(1+r)^5=0

IRR = 18%

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

b.

$9,136 ; $21,936

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.