Happy Ceramic, Inc. produces various household goods. They want to produce one of two possible new products: either ceramic photo frames or ceramic water fountains. Each product would require a machinery investment of $320,000. The useful life for the frames machinery would be six years and the useful life for the fountains machinery would be four years. The expected annual net cash inflows are as follows:
|
Useful |
Frames |
|
|
Life |
||
|
Years |
Annual |
Accumulated |
|
1 |
$ 60,000 |
$ 60,000 |
|
2 |
$ 60,000 |
$ 120,000 |
|
3 |
$ 60,000 |
$ 180,000 |
|
4 |
$ 60,000 |
$ 240,000 |
|
5 |
$ 60,000 |
$ 300,000 |
|
6 |
$ 60,000 |
$ 360,000 |
|
Useful |
Fountains |
|
|
Life |
||
|
Years |
Annual |
Accumulated |
|
1 |
$ 90,000 |
$ 90,000 |
|
2 |
$ 90,000 |
$ 180,000 |
|
3 |
$ 90,000 |
$ 270,000 |
|
4 |
$ 90,000 |
$ 360,000 |
Determine the payback period for each product.
Calculate the accounting rate of return.
Assuming that Home Joy requires a 12% return on each new product, what is the net present value of each product?
Compute the internal rate of return for the project.
Would you invest in one of these projects? Why or why not?
If you had to select one of the two projects, which one would you chose? Why would you choose this one?
