A company must decide between 3 alternatives. First it will determine if each ma

ID: 2792962 • Letter: A

Question

A company must decide between 3 alternatives. First it will determine if each makes sense as a single alternative, and if any project makes sense it will compare the appropriate projects using Annualized Cost. The projects will last 360 months. I-696 per year 3. Project A: Initial Cost300,000. Revenue is constant at 1000 per month month. Salvage Value of Equipment is 30,000 Costs are constant at 100 per Project B: Initial Cost 500,000. Revenue att 1 is 200. The revenue increases each month by 300 per month. Costs can be considered 0 (negligible). Salvage Value is 10,000. Project C: Initial Cost 400,000. Revenue is constant at 1000 per month. Costs start at 80 per month at t 1 and increase each month by 30, Salvage Value is 3,000. Determine if each choice makes sense and compare any sensible single alternative choices using Annualized Worth

Explanation / Answer

Project A

Project B

Year

Cash flows

-300000

-500000

900

200

900

500

900

800

900

1,100

900

1,400

900

1,700

900

2,000

900

2,300

900

2,600

900

2,900

359

900

107,600

360

30,900

117,900

NPV at 0.5%

-$144,185.36

$5,926,378.07

Thus we select project B as it has positive NPV.

And project C doesnot make sense as its cost increases by 30 every month and thus it will show losses in few months time as its cost increase more than revenue per month of 1000.. hence we have only considered NPVs for Project B and Project A as they are sensible choices.

But Out of the two we select project B.