Problem 10.16 a-b (Solution Video)

Cullumber Industries is expanding its product line and its production capacity. The costs and expected cash flows of the two independent projects are given in the following table. The firm uses a discount rate of 15.62 percent for such projects.

Year		Product Line Expansion			Production Capacity Expansion
0		-$2,867,100			-$6,652,400
1		623,100			3,077,800
2		1,024,000			3,077,800
3		1,024,000			3,077,800
4		1,024,000			2,527,900
5		1,024,000			2,527,900

a. What are the NPVs of the two projects? (Enter negative amounts using negative sign, e.g. -45.25. Do not round discount factors. Round other intermediate calculations and final answer to 0 decimal places, e.g. 1,525.)

NPV of product line expansion is		$
NPV of production capacity expansion is		$

b. Should both projects be accepted? or either? or neither? Explain your reasoning.

Cullumber should accept

neither projectonly the product line expansiononly the production capacity expansionboth projects

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