A TO Z INC. IS CONSIDERING ADDING A NEW PRODUCT LINE TO THEIR OFFERINGS. IN 20XX,...

  

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A TO Z INC. IS CONSIDERING ADDING A NEW PRODUCT LINE TO THEIR OFFERINGS. IN 20XX, SALES WERE ONLY $500,000. THEY HAVE SINCE GREW DURING THE 20-YEAR PERIOD TO ALMOST $20 MILLION BY 20XX. HOWEVER, SALES HAVE NOT INCREASED IN THE MOST RECENT 3- YEAR PERIOD AND THIS YEAR PROFIT IS EXPECTED TO BE ABOUT 9% LESS THAN THE PREVIOUS PROFIT. TO ADDRESS THE ISSUE OF DECLINING PROFITABILITY, THE DIRECTOR WANTS TO EXPAND PRODUCT OFFERINGS BY INTRODUCING A NEW PRODUCT. THE DIRECTOR IS HOPING TO CONTINUE THE PRODUCT ON A PERMANENT BASIS BUT HAS DECIDED TO ANALYZE THE PROFITABILITY FOR SIX YEARS ONLY. THE EXPECTED SALES FOR THE FIRST YEAR; (TABLE 1) SCENARIO 1 2 3 4 PROBABILITY 0.25 SALES $880,000 0.40 1,600,000 0.20 3,000,000 3,600,000 0.15 DIRECTOR EXPECTED THE GROWTH IN SALES AT 20% AND 10% FOR INITIAL THREE YEARS AND TWO YEARS AFTER THAT RESPECTIVELY ON YEAR-ON-YEAR BASIS. THOUGH THE WORKING CAPITAL NEED FOR THE PROJECT IS EXPECTED TO BE $200,000. THE INITIAL COST FOR THE PROJECT WOULD BE 2.8 MILLIONS AND SALVAGE VALUE AT $100,000. THE EARNINGS BEFORE THE TAX SHOULD BE AT 30%, WHILE CCA RATE AT 20% DISCOUNT RATE FOLLOWS THE COEFFICIENT OF VARIANCE AS FOLLOWS: (TABLE 2) COEFFICIENT OF VARIATION 0-0.20 0.21-0.40 0.41 0.60 0.61-0.80 OVER 0.80 APPROPRIATE DISCOUNT RATE 8% 10% 14% 16% 20% REQUIREMENT EXPECTED VALUE FOR SALES STANDARD DEVIATION COEFFICIENT OF VARIATION NET PRESENT VALUE OF PROJECT RECOMMENDATION TIME HORIZON COMMENT WITH RULE OPTIONS* A TO Z INC. IS CONSIDERING ADDING A NEW PRODUCT LINE TO THEIR OFFERINGS. IN 20XX, SALES WERE ONLY $500,000. THEY HAVE SINCE GREW DURING THE 20-YEAR PERIOD TO ALMOST $20 MILLION BY 20XX. HOWEVER, SALES HAVE NOT INCREASED IN THE MOST RECENT 3- YEAR PERIOD AND THIS YEAR PROFIT IS EXPECTED TO BE ABOUT 9% LESS THAN THE PREVIOUS PROFIT. TO ADDRESS THE ISSUE OF DECLINING PROFITABILITY, THE DIRECTOR WANTS TO EXPAND PRODUCT OFFERINGS BY INTRODUCING A NEW PRODUCT. THE DIRECTOR IS HOPING TO CONTINUE THE PRODUCT ON A PERMANENT BASIS BUT HAS DECIDED TO ANALYZE THE PROFITABILITY FOR SIX YEARS ONLY. THE EXPECTED SALES FOR THE FIRST YEAR; (TABLE 1) SCENARIO 1 2 3 4 PROBABILITY 0.25 SALES $880,000 0.40 1,600,000 0.20 3,000,000 3,600,000 0.15 DIRECTOR EXPECTED THE GROWTH IN SALES AT 20% AND 10% FOR INITIAL THREE YEARS AND TWO YEARS AFTER THAT RESPECTIVELY ON YEAR-ON-YEAR BASIS. THOUGH THE WORKING CAPITAL NEED FOR THE PROJECT IS EXPECTED TO BE $200,000. THE INITIAL COST FOR THE PROJECT WOULD BE 2.8 MILLIONS AND SALVAGE VALUE AT $100,000. THE EARNINGS BEFORE THE TAX SHOULD BE AT 30%, WHILE CCA RATE AT 20% DISCOUNT RATE FOLLOWS THE COEFFICIENT OF VARIANCE AS FOLLOWS: (TABLE 2) COEFFICIENT OF VARIATION 0-0.20 0.21-0.40 0.41 0.60 0.61-0.80 OVER 0.80 APPROPRIATE DISCOUNT RATE 8% 10% 14% 16% 20% REQUIREMENT EXPECTED VALUE FOR SALES STANDARD DEVIATION COEFFICIENT OF VARIATION NET PRESENT VALUE OF PROJECT RECOMMENDATION TIME HORIZON COMMENT WITH RULE OPTIONS*