Problem 10-20 Present Value of Costs The Aubey Coffee Company is evaluating the

Question

Problem 10-20
Present Value of Costs

The Aubey Coffee Company is evaluating the within-plant distribution system for its new roasting, grinding, and packing plant. The two alternatives are (1) a conveyor system with a high initial cost, but low annual operating costs, and (2) several forklift trucks, which cost less but have considerably higher operating costs. The decision to construct the plant has already been made, and the choice here will have no effect on the overall revenues of the project. The cost of capital for the plant is 10%, and the projects' expected net costs are listed in the table:

What is the present value of costs of each alternative? Round your answers to the nearest dollar, if necessary. Enter your answers as a whole numbers. For example, do not enter 1,000,000 as 1 million.

NPV for Conveyor $    

NPV for Forklift $    

EXPECTED NET COST Year Conveyor Forklift 0 -$500,000 -$200,000 1 -120,000 -160,000 2 -120,000 -160,000 3 -120,000 -160,000 4 -120,000 -160,000 5 -20,000 -160,000

Explanation / Answer

NPV of Conveyor:

NPV of Forklift

Year Conveyor PV of cash outflows 0         (500,000)                                       1         (500,000) 1         (120,000) =(120,000)/(1.1)^1         (109,091) 2         (120,000) =(120,000)/(1.1)^2           (99,174) 3         (120,000) =(120,000)/(1.1)^3           (90,158) 4         (120,000) =(120,000)/(1.1)^4           (81,962) 5           (20,000) =(20,000)/(1.1)^5           (12,418) NPV         (892,802)

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