According to the present-worth criterion, which option would you recommend at 12

Question

According to the present-worth criterion, which option would you recommend at 12%? Dynamic Corporation requires a chemical finishing process for a product under contract for a period of six years. Three options are available. Neither option 1 nor option 2 can be repeated after its process life. However, option 3 will always be available from 7&Z; Chemical Corporation at the same cost during the period that the contract is operative Option 1: Process device A, which costs $100,000 has annual operating and labor costs of $60,000 and a useful service life of four years with an estimated salvage value of $10.000 Option 2: Process device B. which costs $150.000 has annual operating and labor costs of $50,000 and a useful service life of six years with an estimated salvage value of $30.000 Option 3: Subcontract out the process at a cost of $100,000 Answer the following 3 questions

Explanation / Answer

CACLULATION OF THE PRESENT VALUE OF OPTION 1 Years Cash Outflow PVF @ 12% (B) Present Value (A XB) 0     1,00,000.00 $               1.00 $     1,00,000.00                                1 $     60,000.00               0.8929 $         53,571.43                                2 $     60,000.00               0.7972 $         47,831.63                                3 $     60,000.00               0.7118 $         42,706.81                                4 $     60,000.00               0.6355 $         38,131.08                                3 $   -10,000.00               0.6355 $          -6,355.18 $               4.04 $     2,75,885.78 $     2,75,885.78 Equivalent Cost per year = Present Value of the option / PVF from 0 to 4 years Equivalent Cost per year =     2,75,885.78 "/"By $                    4.04 Equivalent Cost per year =         68,333.39 CACLULATION OF THE PRESENT VALUE OF OPTION 2 Years Cash Outflow PVF @ 12% (B) Present Value (A XB) 0     1,50,000.00               1.0000 $     1,50,000.00                                1 $     50,000.00               0.8929 $         44,642.86                                2 $     50,000.00               0.7972 $         39,859.69                                3 $     50,000.00               0.7118 $         35,589.01                                4 $     50,000.00               0.6355 $         31,775.90                                5 $     50,000.00               0.5674 $         28,371.34                                6 $     50,000.00               0.5066 $         25,331.56                                6 $   -30,000.00               0.5066 $       -15,198.93               5.1114 $     3,40,371.43 Equivalent Cost per year = Present Value of the option / PVF from 0 to 4 years Equivalent Cost per year =     3,40,371.43 "/"By                    5.1114 Equivalent Cost per year =         66,590.55 Option 1 Cost per year = $     68,333.39 Option 2 Cost per year = $     66,590.55 Option 3 Cost per year = $ 1,00,000.00 Answer = Best Option = Option 2

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.