Question

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 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.

Required:
1. What is the net present value of each investment opportunity?
2. Which of the two products should the company pursue?Why?


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  • CreatedMay 20, 2014
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