Atlantis Waters is expanding into the consumer goods market. It is considering two alternative products. The first is a new cleaning solution for cleaning floors. The second is a new mop, self wringing, for cleaning floors. Both products would be introduced at a price of $8.25 per package in real terms. The cleaning solution is projected to sell 3.2 million packages a year, whereas the self-wringing mop would sell 6.3 million packages a year. Cash costs of production in the first year are expected to be $2.40 per package in real terms for cleaning solution product. Production costs are expected to be $5.11 in real terms for the self-wringing mop. All prices and costs are expected to rise at the general inflation rate of 3 percent.

Either product requires further investment. The cleaning solution could be produced using equipment costing $13 million. That equipment would last three years and have no resale value. The machinery required to produce the self-wringing mop would cost $19 million and last three years. The firm expects that equipment to have a $1 million resale value (in real terms) at the end of Year 3. The firmuses straight-line depreciation and hasa tax rate of 21%. The appropriate real discount rate is 5 percent. Calculate the NPV of both investments and make a recommendation based on the NPV.

2 Project Analysis $5.11 in real terms for the self-wringing mop. All prices and costs are expected to rise at the general inflation rate of 3 percent. straight-line depreciation and has a tax rate of 21%. The appropriate real discount rate is 5 percent. Calculate the NPV of both investments and make a recommendation based on the NPV. Input area: Cleaning Solution Product only: Real price Units sold per year Real cost of production Initial investment Self-wringing Mop only: Real price Units sold per year Real cost of production Initial investment Real pretax salvage Both products: Inflation rate Life (years) Tax rate Real discount rate Output area: Output area: Cleaning Solution Product only: Sales Production costs Depreciation EBT Tax Net income OCF NPV Mop Product: Aftertax salvage value Market value Taxes Total Sales Production costs Depreciation EBT Tax Net income OCF NPV Which Project should you do? Cleaning Solution or Mop? Year 1 Year 2 Year 3 Year 1 Year 2 Year 3 2 Project Analysis $5.11 in real terms for the self-wringing mop. All prices and costs are expected to rise at the general inflation rate of 3 percent. straight-line depreciation and has a tax rate of 21%. The appropriate real discount rate is 5 percent. Calculate the NPV of both investments and make a recommendation based on the NPV. Input area: Cleaning Solution Product only: Real price Units sold per year Real cost of production Initial investment Self-wringing Mop only: Real price Units sold per year Real cost of production Initial investment Real pretax salvage Both products: Inflation rate Life (years) Tax rate Real discount rate Output area: Output area: Cleaning Solution Product only: Sales Production costs Depreciation EBT Tax Net income OCF NPV Mop Product: Aftertax salvage value Market value Taxes Total Sales Production costs Depreciation EBT Tax Net income OCF NPV Which Project should you do? Cleaning Solution or Mop? Year 1 Year 2 Year 3 Year 1 Year 2 Year 3