Mountain Recreation, Inc. is considering a new product line. The company currently manufactures
several lines of snow skiing apparel.
The new products, insulated ski bikinis, are expected to
generate sales of 1.2 million per year for the next five years. They expect that during this five-year
period, they will lose about 150,000 each year in sales on their existing lines of longer ski pants.
The new line will require no additional equipment or space in the plant and can be produced in the
same manner as the apparel products. The new project will, however, require that the company
spend an additional 50,000 per year on insurance in case customers sue for frostbite. Also, a new
marketing director would be hired to oversee the line at 75,000 per year in salary and benefits.
Because of the different construction of the bikinis, an increase in inventory of 9,000 would be
required initially. If the marginal tax rate is 35, compute the incremental after-tax cash flows for
years 1-5.
A) 634,500 per year B) 537,500 per year
C) 625,000 per year D) 601,250 per year
Question 2
I301 Motors has several investment projects under consideration, all with positive net present values. However,
due to a shortage of trained personnel, a limit of 1,250,000 has been placed on the capital budget for this year.
Which of the projects listed below should be included in this year's capital budget? Explain your answer.
Project Initial Outlay NPV
A 250,000 325,000
B 250,000 350,000
C 100,000 700,000
D 375,000 112,500
E 375,000 75,000
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