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

	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