Part D. Forget the retirement plan and call the office (ASAP) After spending Fri
ID: 2763890 • Letter: P
Question
Part D. Forget the retirement plan and call the office (ASAP)
After spending Friday morning with his Financial Advisor’s, Charles realized that his boss has been calling and texting him asking for the final decision to include in Monday morning presentation to the finance and accounting committee.
Three different alternatives (Flow-122, Flow-155, and Flow-264) are under consideration for improving material flow in a production process. All the alternatives are considered to have the same life of 20 years.
Based on the information provided in the following table (1);
Table 1. Proposal-Improving Material Flow
Proposal
Initial Investment ($)
Operating Cost, ($/year)
Annual Income ($/year)
Flow-122
-40,000
-2,000
+4,000
Flow-155
-46,000
-1,000
+5,000
Flow-264
-61,000
-500
+8,000
Questions:
1.Which alternative should Charles recommend as “the best” using an incremental ROR analysis if the company MARR is 20% per year? (2pts)
After completing the first analysis, Charles’s received a new text: “Sorry… wrong data… suppliers made a mistake and quoted wrong prices for each of the machines… prepare analysis with half of the initial cost.” Assuming that the initial investment data is corrected (see table 2),
Table 2. Proposal- Improving Material Flow-Revised
Proposal
Initial Investment ($)
Operating Cost, ($/year)
Annual Income ($/year)
Flow-122
-20,000
-2,000
+4,000
Flow-155
-23,000
-1,000
+5,000
Flow-264
-30,500
-500
+8,000
2. If the alternatives are mutually excusive, which alternative should Charles recommend using the ROR analysis is 20% per year? If the alternatives are independent, which one(s) should be selected if the company MARR is now 15%? (2pts)
Proposal
Initial Investment ($)
Operating Cost, ($/year)
Annual Income ($/year)
Flow-122
-40,000
-2,000
+4,000
Flow-155
-46,000
-1,000
+5,000
Flow-264
-61,000
-500
+8,000
Explanation / Answer
Part - A
Flow-122
The profit = Annual Income - Operating cost = 4000 -2000 = 2000 for 20 years
We have to find the present value of the annuity of 2,000 for 20 years at 20% MARR
The PV is given by =pv(rate,nper,pmt) =pv(0.20,20,2000) = $9,739.16
The NPV of flow-122 = $9,739.16 - 40,000 = -$30,260.84
Flow-155:
Profit = 5000-1000 = 4000
The NPV = pv(0.20,20,4000) -46,000 = -$26,521.68
Flow-264:
Profit = 8000-500 = 7500
The NPV =pv(0.2,20,7500) -61,000 = -$24,478.15
Since all the three projects are having negative NPV, none should be selected
Part - B: Corrected data
Flow-122: Profit = 2000
The NPV = pv(0.20,20,2000) -20,000 = -$10,260.84
Flow -155 : Profit = 4000
The NPV = pv(0.20,20,4000) -23,000 = -$3,521.68
Flow-264: profit = 7500
The NPV =pv(0.2,20,7500) -30,500 = +$6,021.85
We would recommend FLOW -264 becuase of positive NPV and ROR.
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