Three alternatives have the following cost and annual benefit data associated wi

Question

Three alternatives have the following cost and annual benefit data associated with them: Data Alt. 1 Alt.2 Alt. 3 Useful Life, Years 10 10 10 First Cost $1,325,000 $1,980,000 $1,650,000 Annual Benefit 265,000 589,000 435,000 Annual M&O; Costs 95,000 97,000 91,000 Annual M&O; Gradient 2,300 2,100 1,980 Salvage Value 145,000 205,000 178,000 Loan Payment 150,946 225,565 187,971 The loan payments are calculated using an interest rate of 10%, a life equal to the life of the machine, and a down payment of 30%. Use a MARR of 12% and determine which machine, if any, should be purchased. Use incremental rate of return for your analysis. Do not forget to use DN in the analysis

Explanation / Answer

Alternative 1

Items

Cash Flow

P.V

Comments

First Cost

-1325000

Down Payment

-397500

-397500

30% of First Cost

Annual Cash flow=Annual Benefit-Annual M&O Cost-Annual M&O gradient

167700

947505

P.V=Cash Flow*Annuity Factor(10 years and 12%)

Loan Payment

-150946

-852844.9

P.V=Loan Payment*Annuity Factor(10 years and 12%)

Slavage Value

145000

46686.1

P.V=Salvage Value/1.12^10

Net Present Value

-256153.7807

Alternative 2

Items

Cash Flow

P.V

Comments

First Cost

-1980000

Down Payment

-594000

-594000

30% of First Cost

Annual Cash flow=Annual Benefit-Annual M&O Cost-Annual M&O gradient

489900

2767935

P.V=Cash Flow*Annuity Factor(10 years and 12%)

Loan Payment

-225565

-1274442.25

P.V=Loan Payment*Annuity Factor(10 years and 12%)

Salvage Value

205000

66004.5

P.V=Salvage Value/1.12^10

Net Present Value

965497.2635

Alternative 3

Items

Cash Flow

P.V

Comments

First Cost

-1650000

Down Payment

-495000

-495000

30% of First Cost

Annual Cash flow=Annual Benefit-Annual M&O Cost-Annual M&O gradient

342020

1932413

P.V=Cash Flow*Annuity Factor(10 years and 12%)

Loan Payment

-187971

-1062036.15

P.V=Loan Payment*Annuity Factor(10 years and 12%)

Salvage Value

178000

57311.2

P.V=Salvage Value/1.12^10

Net Present Value

432688.0861

From Above Alternative 2 has highest NPV ($965497) thus Alternative 2 should be purchased

Items

Cash Flow

P.V

Comments

First Cost

-1325000

Down Payment

-397500

-397500

30% of First Cost

Annual Cash flow=Annual Benefit-Annual M&O Cost-Annual M&O gradient

167700

947505

P.V=Cash Flow*Annuity Factor(10 years and 12%)

Loan Payment

-150946

-852844.9

P.V=Loan Payment*Annuity Factor(10 years and 12%)

Slavage Value

145000

46686.1

P.V=Salvage Value/1.12^10

Net Present Value

-256153.7807

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