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

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 product's working capital will be released for investment elsewhere within the company.

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

2. Calculate the net present value of the investment opportunity pertaining to Product A

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

4. Calculate the net present value of the investment opportunity pertaining to Product B

5a. Calculate the profitability index for Product A and Product B

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

InitialinvestmentinequipmentInitialinvestmentinworkingcapitalAnnualsalesAnnualcashoperatingexpensesCostofrepairsneededinthreeyearsProduct$590,000$104,000$560,000$295,000$64,000A$740,000$79,000$580,000$265,000$89,000ProductB \begin{tabular}{|l|} \hline 1. Income tax expense for Product A \\ \hline Year 1 \\ \hline Year 2 \\ \hline Year 3 \\ \hline Year 4 \\ \hline Year 5 \\ \hline 2. Net present value of Product A \\ \hline 3. Income tax expense for Product B \\ \hline Year 1 \\ \hline Year 2 \\ \hline Year 3 \\ \hline Year 4 \\ \hline Year 5 \\ \hline 4. Net present value of Product B \\ \hline 5-a. Profitability index \\ \hline Product A \\ \hline Product B \\ \hline 5-b. The company should pursue \\ \hline \end{tabular} InitialinvestmentinequipmentInitialinvestmentinworkingcapitalAnnualsalesAnnualcashoperatingexpensesCostofrepairsneededinthreeyearsProduct$590,000$104,000$560,000$295,000$64,000A$740,000$79,000$580,000$265,000$89,000ProductB \begin{tabular}{|l|} \hline 1. Income tax expense for Product A \\ \hline Year 1 \\ \hline Year 2 \\ \hline Year 3 \\ \hline Year 4 \\ \hline Year 5 \\ \hline 2. Net present value of Product A \\ \hline 3. Income tax expense for Product B \\ \hline Year 1 \\ \hline Year 2 \\ \hline Year 3 \\ \hline Year 4 \\ \hline Year 5 \\ \hline 4. Net present value of Product B \\ \hline 5-a. Profitability index \\ \hline Product A \\ \hline Product B \\ \hline 5-b. The company should pursue \\ \hline \end{tabular}