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 3 weeks agoRelated Solutions
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