5 alternatives

The T. H. King Company has introduced a new product line that requires two work centers, A and B for manufacture, Work Center A hos a current capacity of 10,000 units per year, and Work Center B ls capable of 12,500 units per year. This year (year o), sales of the new product line are expected to reach 10,000 units. Growth is projected at an additional 1,000 units each year through year 5. Pre-tax profits are expected to be $25 per unit throughout the 5-year planning period. Two alternatives are being considered a) Expand both Work Centers A and B at the end of year 0 to a capacity of 15,000 units per year, at a total cost for both Work Centers of $100,000. b) Expand Work Center A at the end of year 0 to 12,500 units per year, matching Work Center B, ata cost of $50,000, then expanding both Work Centers to 15,000 units per year at the end of year 3, at an additional cost at that time of $100,000 The King Company will not consider projects that don't show a 5th-year positive net present value using a discount rate of 15%. What are the pre-tax cash flows for the two alternatives compared to the base case of doing nothing for the next five years, and what action, if any, should the company take? Answer: The following table summarizes demand and output capabilities for the two alternatives: Year Alternative #1 2 Demand (units) Benefits (5) Costs (5) Cash Flow (5) Alternative #2 Year 0 2 3 Demand (units) Benefits (5) Costs (S) Cash Flow ($) Alternative #1 Net Present Value: NPV = Alternative #2 Not Present Value: NPV =