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Maven Manufacturing owns a warehouse that has historically been used to store finished goods associated with electro-pump products. However, as the company gradually phases
Maven Manufacturing owns a warehouse that has historically been used to store finished goods associated with electro-pump products. However, as the company gradually phases out the electro-pump product line, they are considering renovating the current facility to manufacture a different product line. The production engineer at Maven believes that the warehouse could be modified to accommodate one of two potential new product lines. The cost and revenue details for these two product options are provided below Initial cash expenditure Product A Warehouse Modification $115,000 Equipment $250,000 $215,000 $126,000 8 years $25,000 Annual Revenues Annual O&M costs Product Life Salvage value (equipment) Product B $189,000 $315,000 $289,000 $168,000 8 years $35,000 After eight years, the renovated structure will no longer offer sufficient space for efficient production of either product line. At that point, Maven intends to revert to using the building as a warehouse for storing raw materials, similar to its previous function. Maven has a required return on investment of 12%. Given these circumstances, which product should be chosen for manufacturing?
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