Shimano Company has an opportunity to manufacture and sell one of two new products for a five year period. The company's tax rate is 30% and its after-tax cost of capital is 14%. The cost and revenue estimates for each product are as follows:

The equipment pertaining to both products has a useful life of five years and no salvage value.
The company uses the straight-line depreciation method for financial reporting and tax purposes.
At the end of five years, each product's working capital will be released for investment elsewhere within the company.
Required:
1. Calculate the annual income tax expense for each of years 1 through 5 that will arise if Product A is introduced.
2. Calculate the net present value of the investment opportunity pertaining to Product A.
3. Calculate the annual income tax expense for each of years 1 through 5 that will arise if Product B is introduced.
4. Calculate the net present value of the investment opportunity pertaining to Product B.
5. Calculate the project profitability index for Product A and Product B. Which of the two products should the company pursue? Why?

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Product A Product B Initial investment in equipment Initial investment in working capital Annual sales $400,000 $85,000 $370,000 200,000 $17 $550.000 $60,000 $390,000 $170,000 $70,000 Cost of repairs needed in three years $45,000