Stephen Zehnder, an enterprising engineer, wants to get into business. He is loo

Question

Stephen Zehnder, an enterprising engineer, wants to get into business. He is looking at the
following two alternatives. He has compiled the cost data for both alternatives at shown in table
below. If Stephen wants to have at least a rate of return of 12% on this business investment
(MARR), which one should he choose? (Use incremental analysis) (15 points)
Data Convenient Store with Gas Ice Cream Store


Initial Cost $80,000 $120,000
Annual Income $12,000 $ 20,000
After 20 years, he plans to sell the business at double the initial cost.

Explanation / Answer

revenues A =pv(.12,20,12000)+pv(.12,20,0,160000) revenues B =pv(.12,20,20000)+pv(.12,20,0,240000) present value of the future cash flows and the value they wil get whn they will sell the business. A B net increase/(decrease) revenues $106,220.01 $174,268.90 $68,048.89 costs $ 80,000 $120,000 ($40,000) net income $26,220.00 $54,268.89 $28,048.89 hence project B should be chosen.

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