-The Cordell Coffee Company is evaluating the within-plant distribution system f

Question

-The Cordell 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 required rate of return for the plant is 9 percent, and the projects' expected net costs are listed in the following table:
Year  Conveyor     Forklift
0       $(300,000)    $(120,000)     A) what is the present value of cost of each
1          (66,000)        (96,000)  alternative? Which method should be chose
2          (66,000)        (96,000)     B) what is the IRR of each alternative?
3          (66,000)        (96,000)
4          (66,000)        (96,000)
5          (66,000)        (96,000)

Explanation / Answer

PC(A) = 300000+66000(1.09^5 -1)/(0.09*1.09^5) = 556716.98 ($) PC(B) = 120000+ 96000(1.09^5-1)?(0.09*1.09^5) = 493406.52 ($) a) HENCE, ALTERNATIVE B SHOULD BE CHOSEN AS PRESENT COST OF ALT. B IS LOWER THAN THAT OF ALT. A . b) As there are only costs from t= 0 to t = 5, it may not be possible to calculate IRR. At IRR

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