Reference no: EM132742322

A company is considering reconfiguring an existing production line to produce medical personal protective equipment for healthcare professionals. To accelerate such development, the company has negotiated a total governmental grant of $100,000 received on two transactions; a receipt of $70,000 at the beginning and the remainder at the end of the first year. Only 70% of the total grant is payable back with an annual interest rate of 1% at the end of the third year. There are two alternatives (configurations) to create the mask production line. The company's realMinimum Attractive Rate of Return (MARR) is 6%. Average annual inflation rate is 1.20%. The properties of these investments are provided in the following table (all dollar values are estimated in today's dollars):

Configuration 1 Configuration 2
Initial Cost $180,000 $255,000
Annual Maintenance cost $15,000/year $22,000/year
Annual Sales 43,000 units/year 51,000 units/year
Production unit cost $1.5/unit $1.0/unit
Product unit sale price $3.75/unit $3.75/unit
Salvage value after 5 years $60,000 $70,000
CCA Rate 30% 30%
Service life 3 years 3 years

For both alternatives, answer the following questions considering applicable taxes whenever possible:

[a] Calculate the NPW of both alternatives taking into account all taxes at a tax rate of 40% (i.e., for after-tax cash flow). Half-year rule applies.

[b] Which alternative is economically better?