Computer Disk Duplicators, Inc. has been considering several capital investment proposals for the year beginning in 2004. For each investment proposal, the relevant cash flows and other relevant financial data are summarized in the table below. In the case of a replacement decision, the total installed cost of the equipment will be partially offset by the sale of existing equipment. The firm is subject to a 40 percent tax rate. The firm's cost of capital is 15 percent.

\begin{array}{llll}&&\text { Proposal }\\\text { Type of Capital } & 1 & 2 & 3 \\\text { Budgeting Decision } & \text { Expansion } & \text { Replacement } & \text { Replacement }\\\hline&& \text { Mut Excl } & \text { Mut Excl } \\\text { Type of Project }&\text { Independent } & \text { with 3 } & \text { with 2 }\\\hline\text { Cost of new asset } & \$ 1,500,000 & \$ 200,000 & \$ 300,000 \\\text { Installation costs } & \$ 0 & \$ 0 & \$ 15,000 \\\text { CCA rate (new asset) } & 10 \% & 20 \% & 20 \%\\\text { Original cost of old asset } & \text { N/A* } & \$ 80,000 & \$ 100,000 \\\text { Purchase date (old asset) } & \text { N/A } & 1 / 1 / 1997 & 1 / 1 / 2000 \\\text { Sale proceeds (old asset) } & \text { N/A } & \$ 50,000 & \$ 120,000 \\\text { CCA rate (old asset) } & \text { N/A } & 20 \% & 20 \%\\\text { Annual net profits before }\\\text { depreciation \& taxes (old) }&N/A&\$30,000&\$25,000\\\text { Annual net profits before }\\\text { depreciation \& taxes (new) }&\$250,000&\$100,000&\$175,000\\\end{array}

\text { "Not applicable }

-For Proposal 2, the annual incremental after-tax operating income is___________
A) $48,000
B) $42,000
C) $70,000
D) $89,000

On a Purely Theoretical Basis, the NPV Is the Better

Multiple Choice

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