A new alloy can be produced by Process A, which costs $200,000 to implement. The

Question

A new alloy can be produced by Process A, which costs $200,000 to implement. The operating cost will be $10,000 per quarter with a salvage value of $25,000 after its 2-year life. Process B will have a first cost of $250,000, an operating cost of $15,000 per quarter, and a $40,000 salvage value after its 4 year life. The interest rate is 8% per year compounded quarterly. Using present value analysis which process should be selected?


Please show work...I cannot rate unless there is work so I will know how to work the problem.

Explanation / Answer

Process A Initial cost = $200,000 Operating cost per quarter = $10000 Salvage value after 8 quarters = $25000 i = 0.08 r =1/1+i = 1/1.08 Now NPV = -200000 - 10000( r1+r2+r3+r4+r5...+r8) + 25000r8 = -200000- 57466 +226.86 = -243959.27 Process B Initial cost = $250,000 Operating cost per quarter = $15000 Salvage value after 16 quarters = $40000 i = 0.08 r =1/1+i = 1/1.08 Now NPV = -250000 - 15000( r1+r2+r3+r4+r5...+r16) + 40000r16 = -250000-132770 + 11675.61 = -371094 Hence Process A will be the chosen one. Hope this will do. :)

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