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Sunland Industries is expanding its product line and its production capacity. The costs and expected cash...

Sunland 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 16.08 percent for such projects. Year Product Line Expansion Production Capacity Expansion 0 -$2,053,800 -$6,584,800 1 663,900 2,742,200 2 839,000 2,742,200 3 839,000 2,742,200 4 839,000 2,612,300 5 839,000 2,612,300 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. Sunland should accept .

Solutions

Expert Solution

Product Line

Net present value is solved using a financial calculator. The steps to solve on the financial calculator:

  • Press the CF button.
  • CF0= -$2,053,800. It is entered with a negative sign since it is a cash outflow.
  • Cash flow for all the years should be entered.
  • Press Enter and down arrow after inputting each cash flow.
  • After entering the last cash flow, press the NPV button and enter the discount rate of 16.08%.
  • Press the down arrow and CPT buttons to get the net present value.

Net Present value of cash flows at 16.08% discount rate is $537,369.

Production Capacity

Net present value is solved using a financial calculator. The steps to solve on the financial calculator:

  • Press the CF button.
  • CF0= -$6,584,800. It is entered with a negative sign since it is a cash outflow.
  • Cash flow for all the years should be entered.
  • Press Enter and down arrow after inputting each cash flow.
  • After entering the last cash flow, press the NPV button and enter the discount rate of 16.08%.
  • Press the down arrow and CPT buttons to get the net present value.

Net Present value of cash flows at 16.08% discount rate is $2,244,058.

The company should accept both projects since they have the positive net present value.

Projects with a positive net present value are accepted in case of independent projects.

In case of any query, kindly comment on the solution.

jeff jeffy answered 1 year ago
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