Chapter 6, Problem 41QAP

Summary Introduction

Adequate information:

Cost of investment of headache-only pills = $28,000,000

Economic life of headache-only pills = 3 years

Number of packages produce for headache-only pills = 3,200,000

Price per package of headache-only pills = $8.25

Production cost per package of headache-only pills = $3.60

Market value of headache and arthritis pills project = $1,000,000

Cost of investment of headache and arthritis pills project = $36,000,000

Economic life of headache and arthritis pills project = 3 years

Number of packages produce for headache and arthritis pills project = 3,200,000

Price per package of headache and arthritis pills project = $8.25

Production cost per package of headache and arthritis pills project = $4.55

Inflation rate = 3% or 0.03

Tax rate = 22% or 0.22

Appropriate real discount rate = 5% or 0.05

To determine: The product that should be chosen by the company.

Introduction: The term Net present value refers to the summation of the present value of cash inflows in each period minus the summation of the present value of cash outflow.

The decision criteria of net present value are that in the case of the mutually exclusive project, the project having the higher net present value should be selected.