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In: Accounting

X Company is planning to stop the production and sale of Product Q, which lost $8,000...

X Company is planning to stop the production and sale of Product Q, which lost $8,000 last year. If Product Q is dropped, two things will happen in each of the next three years: 1) last year's loss will be avoided, and 2) sales of Product R will be increased, contributing $10,000 to annual profits. In addition, if Product Q is dropped, the company will be able to sell some equipment immediately for $14,000. Assuming a discount rate of 4%, what is the net present value of stopping the production and sale of Product Q?

Solutions

Expert Solution

particulars Cash flows (a) PVIF @4% (b) present value(a)*(b)
loss saving on sale of product Q $           8,000.00 2.775 $                  22,200.00
increase in profit -product R $         10,000.00 2.775 $                  27,750.00
sale of equipment $         14,000.00 1 $                  14,000.00
Present value of stopping the product & sale of product Q $                  63,950.00

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