Question

In: Accounting

X Company is planning to stop the production and sale of Product Q, which lost $12,000...

X Company is planning to stop the production and sale of Product Q, which lost $12,000 last year. If Product Q is dropped, two things will happen in each of the next four years: 1) last year's loss will be avoided, and 2) sales of Product R will be increased, contributing $12,000 to annual profits. In addition, if Product Q is dropped, the company will be able to sell some equipment immediately for $17,000. Assuming a discount rate of 4%, what is the net present value of stopping the production and sale of Product Q?

Solutions

Expert Solution

Computation of net present value of stopping the production and sale of Product Q:-
Net present value of stopping the production and sale of Product Q:
Amount PV factor Present value
A B C D = B*C
a Savings in per year loss for 4 years $         12,000 PVAF(4%,4) 3.62990 $               43,559
b Contribution from Product R per year for 4 years $         12,000 PVAF(4%,4) 3.62990 $               43,559
c Cash Inflow from sale of equipment immediately $         17,000 1 $               17,000
Net present value of stopping the production and sale of Product Q a+b+c $             104,118
PVAF(4%,4) = Prsent Value of Annuity at 4% for 4 years = 3.62990

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ekkarill92 answered 5 months ago
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