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A company is considering two alternative methods of producing a new product. The relevant data concerning the alternatives are presented below. Alternative Alternative I
A company is considering two alternative methods of producing a new product. The relevant data concerning the alternatives are presented below. Alternative Alternative I II $120,000 $60,000 $12,000 $20,000 6 years Initial investment $64,000 $50,000 $20,000 $16,000 4 years Annual receipts Annual disbursements Annual depreciation Expected life Salvage value 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 10 percent. 1. Calculate the Cash flow paying particular attention to the cash flow impact of taxes and depreciation, 2. Calculate the net present value of each alternative. 3. Calculate the internal rate of return for each alternative. 4. If the company can implement only one of the two alternatives, and there is no restriction on investment amount, which alternative should be chosen? Why?
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