Soccer consultants Bob and John, require a computer network for their employees.
ID: 2577514 • Letter: S
Question
Soccer consultants Bob and John, require a computer network for their employees. They received three proposals, with details outlined below:
Proposal A
Proposal B
Proposal C
Initial investment in equipment
$100,000
$80,000
$70,000
Annual cash increase in operations:
Year 1
70,000
35,000
80,000
Year 2
10,000
45,000
0
Year 3
45,000
45,000
0
Salvage value
0
0
0
Estimated life
3 yrs
3 yrs
1 yr
Compute the net present value for each proposal. Use a required rate of return of 14%.
Rank each proposal 1, 2, and 3 using each method separately. Which proposal is best? Why?
Proposal A
Proposal B
Proposal C
Initial investment in equipment
$100,000
$80,000
$70,000
Annual cash increase in operations:
Year 1
70,000
35,000
80,000
Year 2
10,000
45,000
0
Year 3
45,000
45,000
0
Salvage value
0
0
0
Estimated life
3 yrs
3 yrs
1 yr
Explanation / Answer
proposal A discount PV year cash factor 0 -100,000 1 -100,000 1 70,000 0.877 61390 2 10,000 0.769 7690 3 45,000 0.675 30375 net present value -545 proposal B discount PV year cash factor 0 -80,000 1 -80,000 1 35,000 0.877 30695 2 45,000 0.769 34605 3 45,000 0.675 30375 net present value 15,675 proposal C proposal B discount PV year cash factor 0 -70,000 1 -70,000 1 80,000 0.877 70160 2 0 0.769 0 3 0 0.675 0 net present value 160 proposal B is best since the net present value is highest
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