Chapter 7 Problem 14: A company is considering two mutually exclusive methods of producing a new product. The relevant data concerning the alternatives appear below. 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 the discount rate is 10 percent. Calculate the net present value of each alternative. Calculate the benefit-cost ratio for each alternative. Calculate the internal rate of return for each alternative. If the company is not under capital rationing which alternative should be chosen? Why? Again assuming no capital rationing, suppose the company plans to produce the product indefinitely rather than quit when the equipment wears out. Which alternative should the company select? Why? If the company is experiencing capital rationing and plans to terminate production when the equipment wears out, which alternative should the company select? How does your answer depend on other investments (not mentioned in this problem) that the company has available? Alternative 1 Alternative 2 Other assumptions Initial investment $55,000 $120,000 Tax rate 50% Annual receipts $50,000 $60,000 Discount rate 10% Annual disbursements $20,000 $12,000 Annual depreciation $16,000 $20,000 Expected life (years) 4 6 Salvage value $0 $0