One of the company’s technology patents is about to expire, inducing a likely rush of product entries from the competition. Currently, the product line is projected to have stagnant sales of one million units for the next seven years from 2015 to 2022. The unit price is expected to decrease slightly by 1% per year during the same period.

The profitability of this product is estimated to be $1,166,000 in 2015, as indicated in Table 7.25.

Both the CGS and the SG&A expenses are expected to increase by 3% per year from 2015 to 2022. The depreciation charge is estimated to remain constant at $1 million per year, and there is no salvage value for the equipment at the end of 2021.

If the product is continued as planned, the company can recover a working capital of $3.9 million at the end of 2021 from sales of residual inventory and collection of accounts receivable after having discharged all applicable short-term liabilities.

If the management decides to discontinue this product line at the end of 2014, it can sell the fixed assets related to the product line (having a book value of

$7 million) for about $3 million, and the loss of $4 million will be tax deductible.

Furthermore, the company can recover the working capital (inventory plus accounts receivable, minus accounts payable and other expenses) worth about

$3.9 million at the end of 2014.

Assuming that the appropriate discount rate is 12%, would you recommend that this product line be discontinued at the end of 2014 or continued through 2021?

What is the next-best alternative open to the company, besides either shutting it down immediately at the end of 2014 or continuing to run it till 2021?