Shimano Company has an opportunity to manufacture and sell one of two new products for a five-year period. The companys tax rate is 30% and its after-tax cost of capital is 12%. The cost and revenue estimates for each product are as follows:

	Product A			Product B
Initial investment in equipment	$	530,000		$	680,000
Initial investment in working capital	$	98,000		$	73,000
Annual sales	$	500,000		$	520,000
Annual cash operating expenses	$	265,000		$	235,000
Cost of repairs needed in three years	$	58,000		$	83,000

The equipment pertaining to both products has a useful life of five years and no salvage value. The company uses the straight-line depreciation method for financial reporting and tax purposes. At the end of five years, each products working capital will be released for investment elsewhere within the company.

Required:

1. Calculate the annual income tax expense for each of the years 1 through 5 that will arise if Product A is introduced.

Income Tax Expense for Product A:

Year 1 =

Year 2 =

Year 3 =

Year 4 =

Year 5 =

2. Calculate the net present value of the investment opportunity pertaining to Product A. (Round your intermediate calculations and final answer to the nearest whole dollar.)

Net Present Value for Product A =

3. Calculate the annual income tax expense for each of the years 1 through 5 that will arise if Product B is introduced.

Income Tax Expense for Product B:

Year 1 =

Year 2 =

Year 3 =

Year 4 =

Year 5 =

4. Calculate the net present value of the investment opportunity pertaining to Product B. (Round your intermediate calculations and final answer to the nearest whole dollar.)

Net Present Value for Product B =

5-a. Calculate the project profitability index for Product A and Product B. (Round your final answers to 3 decimal places)

Product Profitability Index for Product A =

Product Profitability Index for Product B =

5-b. Based on the profitability index of the two products, which one should the company pursue?