A company planner is considering three (3) mutually exclusive investment alterna

Question

A company planner is considering three (3) mutually exclusive investment alternatives. Each has a 10-year life with the given salvage values. The company MARR is 6%.

Alternatives

A

B

C

Initial Cost

$1,000

$1,350

$2,300

Annual Profit

$180

$225

$380

Salvage Value

$25

$50

$100

               

Using the Project Selection Methodology specified, select the best alternative.

a. The annual equivalent criterion.

b. The internal rate of return (ROR) criterion.

c. Payback criterion, using discounted cash flows at 10%.

d. Payback criterion, using non-discounted cash flows, i.e., no time value of money)

e. The present value criterion.

f. The benefit-cost ratio approach with n = 8 and non-discounted cash flows.

Alternatives

A

B

C

Initial Cost

$1,000

$1,350

$2,300

Annual Profit

$180

$225

$380

Salvage Value

$25

$50

$100

Explanation / Answer

Alternatives A B C (A/P,6%,10) 7.360 Initial Cost $           1,000 $           1,350 $            2,300 (A/F,6%,10) 13.1808 Annual Profit $               180 $               225 $                380 Salvage Value $                 25 $                 50 $                100 AEC AE of A = -1000(A/P,6%,10)+180+25(A/F,6%,10) -135.867958 180 1.896699 46.02874 2 AE of B = -1350(A/P,6%,10)+225+50(A/F,6%,10) -183.421744 225 3.793398 45.37165 3 AE of C = -2300(A/P,6%,10)+380+100(A/F,6%,10) -312.496304 380 7.586796 75.09049 1 Year A B C 0 -1000 -1350 -2300 1 180 225 380 2 180 225 380 3 180 225 380 4 180 225 380 5 180 225 380 6 180 225 380 7 180 225 380 8 180 225 380 9 180 225 380 10 205 275 480 12.60% 10.87% 10.73% IRR(B13:B23) IRR(C13:C23) IRR(D13:D23) 1 2 3 Year A PVF @ 6% Present Value C PV B Present Value C PV C Present Value C PV 0 -1000 1 -1000 -1000 -1350 -1350 -1350 -2300 -2300 -2300 1 180 0.9434 169.8113 -830.189 225 212.2642 -1137.74 380 358.4906 -1941.51 2 180 0.8900 160.1994 -669.989 225 200.2492 -937.487 380 338.1986 -1603.31 3 180 0.8396 151.1315 -518.858 225 188.9143 -748.572 380 319.0553 -1284.26 4 180 0.7921 142.5769 -376.281 225 178.2211 -570.351 380 300.9956 -983.26 5 180 0.7473 134.5065 -241.775 225 168.1331 -402.218 380 283.9581 -699.302 6 180 0.7050 126.8929 -114.882 225 158.6161 -243.602 380 267.885 -431.417 7 180 0.6651 119.7103 4.828659 225 149.6379 -93.9642 380 252.7217 -178.695 8 180 0.6274 112.9342 117.7629 225 141.1678 47.20361 380 238.4167 59.72165 9 180 0.5919 106.5417 224.3046 225 133.1772 180.3808 380 224.9214 284.6431 10 205 0.5584 114.4709 338.7755 275 153.5586 333.9393 480 268.0295 552.6726 NPV 338.78 2 333.94 3 552.67 1 Discounted Payback 6.96 Years 1 7.67 Years 2 7.75 Years 3 Payback 5.56 Years 1 6 Years 2 6.05 Years 3

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