Galactic Enterprises Inc. is looking to launch a new product. It has exactly $1,000,000 available in Cash to do so. It has developed 2 prototypes, Product A and Product B. The company uses a Discount Rate of 12% to screen and prioritize all of its product launches. (Ignore Income Tax and HST in this case).

PRODUCT A

This Product requires the purchase of new machinery at a cost of $900,000. It will also allow the company to dispose of an older machine for $50,000 as well, because the new one can handle some of the old machines functions elsewhere in the factory. The new Product will generate $150,000 in annual revenue for an estimated 7 years, before the Product becomes obsolete. Each year operating expenses tied to the new machine will be $30,000. The company believes it will be able to sell the machine at the end of the 7 years for a salvage value of $90,000. At the end of year 4 a massive overhaul will be required for the machine to keep it operating efficiently. Estimated cost: $25,000.

PRODUCT B

No new machinery is required because the company can use existing machinery. They will have to expand the plant to accommodate the greater area for this product. Product B is much larger in size than Product A. Cost to do so is $1,100,000 This new product will generate annual net cash flow of $220,000 for 12 years before the product becomes obsolete. Due to the nature of Product B, the company qualifies for a $100,000 government grant right away.

REQUIRED

1) Calculate the NPV of each Product

2) Calculate the Profitability Index for each Product

3) Calculate the Payback Period for each Product to the nearest year.

4) Which Product should the company choose?

5) How would your answer to question 4 change if the company did not receive the $100,000 grant for Product B?

This is Management Accounting. Please present the answers on Excel spreadsheet. Thank you so much!