4) XYZ company is evaluating 3 mutually exclusive investment proposals. (Initial

Question

4) XYZ company is evaluating 3 mutually exclusive investment proposals.

(Initial One time) (Annual Revenue) (Annual Operating Cost) (Number of years) (Salvage Value)

Proposal 1 $420,000 $45,000 $10,000 10 $40,000

Proposal 2 $320,000 $ 68,000 $12,000 8 $65,000

Proposal 3 $78,000 $13000 $1000 13 $13,000

You are a consultant and you have to evaluate the 3 proposals and give out your recommendation as to which option(s) to choose. You have to choose the best evaluating factor since the proposals have different life. Assume MARR of XYZ company to be 10%

Explanation / Answer

The best method would be annual worth (AW) analysis.

Working note:

Annual net benefit = Revenue - Operating cost

Proposal 1: $(45,000 - 10,000) = $35,000

Proposal 2: $(68,000 - 12,000) = $56,000

Proposal 3: $(13,000 - 1,000) = $12,000

AW, proposal 1 ($) = - 420,000 x A/P(10%, 10)** + 35,000 + 40,000 x PVIF(10%, 10)

= - 420,000 x 0.16 + 35,000 + 40,000 x 0.39

= - 67,200 + 35,000 + 15,600

= - 16,600

AW, proposal 2 ($) = - 320,000 x A/P(10%, 8)** + 56,000 + 65,000 x PVIF(10%, 8)

= - 320,000 x 0.19 + 56,000 + 65,000 x 0.47

= - 60,800 + 56,000 + 30,550

= 25,750

AW, Proposal 3 ($) = - 78,000 x A/P(10%, 13) + 12,000 + 13,000 x PVIF(10%, 13)

= - 78,000 x 0.14 + 12,000 + 13,000 x 0.29

= - 10,920 + 12,000 + 3,770

= 4,850

Since proposal 2 has highest positive AW, this should be chosen.

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