Product A Product B Initial investment in equipment Initial investment in working capital Annual sales .... Annual cash operating expenses Cost of repairs needed in three years $400,000 $85,000 $370,000 $550,000 $60,000 $390,000 $170,000 $70,000 ..... .... $200,000 ..... $45,000
Income Taxes and
Shimano Company 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 14%. 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
Required:
1. Calculate the annual income tax expense for each of years 1 through 5 that will arise if 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.
5. Calculate the project profitability index for Product A and Product B. Which of the two products should the company pursue? Why?
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