A Company Is Trying to Decide Which of Two New

Essay

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:
$$\begin{array} { l | l | l } &{ \text { Product A } } & \underline { \text { Product B } } \\\hline \text { Unit sales } & 25,000 & 20,000 \\\hline \text { Unit sales price } & \$ 30 & \$ 30 \\\hline \text { Direct materials } & \$ 15,000 & \$ 8,000 \\\hline \text { Direct labor } & \$ 120,000 & \$ 80,000 \\\hline \text { Other cash operating expenses } & \$ 30,000 & \$ 25,000 \\\hline \text { New equipment costs } & \$ 2,500,000 & \$ 1,500,000 \\\hline \text { Estimated useful life (no salvage) } & 5 \text { years } & 5 \text { years }\end{array}$$ 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?