MAIRR

Brown intends to start a new project producing either Product A or Product B. Each product will require an additional capital cost of $50 000. Both products are expected to last 4 years. The following information is available on Product A: 1. Sales volume in year 1 would be 10000 units with a selling price of $7. 2. The volume would rise by 5% in year 2 and by another 5% in Year 3 3. Popularity is then expected to fall in year 4 and there would be a 20% fall in volume. 4. The selling price would not change. 5. The variable costs will be $3 per unit in year 1, will rise to $4 in year 2 and will then remain unchanged. 6. Annual fixed costs payable will be $11 000 and will remain unchanged. Required (a) Calculate the net cash flows for each year and in total for product A [10] Additional Information Brown’s cost of capital is 10% and the discount factors are: Year 10% 25% 1 0.909 0.800 2 0.826 0.640 3 0.751 0.512 4 0.683 0.410 Required (b) Calculate the net present value of Product A. [5] 3 (c) Calculate the Internal Rate of Return for Product A [7] Additional Information Brown has carried out the same calculations for product B. He has calculated the net present value of Product B as $30 400. Required (d) Advise Brown which product he should make based solely on the net present value. Justify your answer. [2] (e) Explain why Brown may or may not use the payback method. [3] (f) State three non-financial factors Brown should consider when choosing between Product A and Product B. My question is that i am obtaining positive value for both npvs. Is it possible?