The Acme Blivet Company is evaluating three investment situations: (1) produce a new line of aluminum blivets, (2) expand its existing blivet line to include several new sizes, and (3) develop a new, higher-quality line of blivets. If only the project in question is undertaken, the expected present values and the amounts of investment required are as follows:

	INVESTMENT	PRESENT VALUE OF
PROJECT	REQUIRED	FUTURE CASH FLOWS
1	$200,000	$290,000
2	115,000	185,000
3	270,000	400,000

If projects 1 and 2 are jointly undertaken, there will be no economies; the investment required and present values will simply be the sum of the parts. With projects 1 and 3, economies are possible in investment because one of the machines acquired can be used in both production processes. The total investment required for projects 1 and 3 combined is $440,000. If projects 2 and 3 are undertaken, there are economies to be achieved in marketing and producing the products but not in investment. The expected present value of future cash flows for projects 2 and 3 combined is $620,000. If all three projects are undertaken simultaneously, the economies noted above will still hold. However, a $125,000 extension on the plant will be necessary, as space is not available for all three projects. Which project or projects should be chosen?

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Solution Project Investment Required Present Value of Future ... View the full answer