Shimano Company has an opportunity to manufacture and sell one of two new products for a five-year period. The companyâs 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 productâs working capital will be released for investment elsewhere within the company.
1. What is the net present value of each investment opportunity?
2. Which of the two products should the company pursue?Why?