manufactoring costs from a scrapped poor quality product are $6000 per year. an

Question

manufactoring costs from a scrapped poor quality product are $6000 per year. an investment in an employee training program can reduce this cost. program A reduces the cost by 75% and requires an investment of $12,000. Program B reduces the cost by 95% and will cost $20,000. Based on low turnover at the plant, either program should be effective for the next five years. If interest is 20%, the present worth of the two programs is nearest what values?(consider cash reduction a positive cash flow)

A)a $-25,460 b$-37,049    B)a $1460 b $-2951 C)a $5060 b $1609   D) a $13460 b $17049

Explanation / Answer

We see that Prog A will give an annual CF of 75%*$6000 = $4500
Prog B will give annual CF of 95%*$6000 = $5700
Disc Rate Kd = 20%
So PV of Annuity of $1 for 5 yrs with Kd = 20% is 2.9906

So NPV of Prog A = CF0+CF1+ ....+Cf5 = -12000+2.9906*4500 = $1,458

So NPV of Prog B= CF0+CF1+ ....+Cf5 = -20000+2.9906*5700 = $2,954

So Prog A is more effective as it gives a Positive NPV

Answer b

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