Martinez Company has money available for investment and is considering two projects each costing $70,000. Each project has a useful life of 3 years and no salvage value. The investment cash flows follow:
Project A Project B
Year 1 $ 8,000 $28,000
Year 2 24,000 28,000
Year 3 52,000 28,000
If 8% is an acceptable earnings rate, which project should be selected? Justify your response.
4. Guong Co. has three product lines in its retail stores: books, videos, and music. Results of the fourth quarter are presented below: (25 points)
Books Music Videos Total
Units sold 1,000 2,000 2,000 5,000
Revenue $22,000 $40,000 $23,000 $85,000
Variable departmental costs 17,000 22,000 12,000 51,000
Direct fixed costs 1,000 3,000 2,000 6,000
Allocated fixed costs 7,000 7,000 7,000 21,000
Net income (loss) $ (3,000) $ 8,000 $ 2,000 $ 7,000
The allocated fixed costs are unavoidable. Demand of individual products are not affected by changes in other product lines.
What will happen to profits if Guong Co. discontinues the Books product line?
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