Three alternatives have the following costs and annual benefits data associated

Question

Three alternatives have the following costs and annual benefits data associated with them:

Alt.1:

Useful Life, years:

First Cost:$1,325,000

Annual Benefit: 265,000

Annual M&O Costs: 95,000

Annual M&O Gradient: 2,300

Salvage Value: 145,000

Loan Payment: 150,946

Alt.2:

Useful Life, years: 10

First Cost: $1,980,000

Annual Benefit: 589,000

Annual M&O Costs: 97,000

Annual M&O Gradient: 2,100

Salvage Value: 205,000

Loan Payment: 225,565

Alt.3:

Useful Life, years: 10

First Cost: $1,650,000

Annual Benefit: 435,000

Annual M&O Costs: 91,000

Annual M&O Gradient: 1,980

Salvage Value: 178,000

Loan Payment: 187,971

The loan payments are calculated using an interest rate of 10%, a life equal tot he life of the machine and a down payment of 30%. Using a MARR of 12%, determine which machine, if any, should be purchased. USE INCREMENTAL RATE OF RETURN FOR YOUR ANALYSIS!

Explanation / Answer

Answer:

Alternative 1

Items

Cash Flow

P.V

Comments

First Cost

-1325000

Down Payment

-397500

-397500

30% of First Cost

Annual Cash flow=Annual Benefit-Annual M&O Cost-Annual M&O gradient

167700

947505

P.V=Cash Flow*Annuity Factor(10 years and 12%)

Loan Payment

-150946

-852844.9

P.V=Loan Payment*Annuity Factor(10 years and 12%)

Slavage Value

145000

46686.1

P.V=Salvage Value/1.12^10

Net Present Value

-256153.7807

Alternative 2

Items

Cash Flow

P.V

Comments

First Cost

-1980000

Down Payment

-594000

-594000

30% of First Cost

Annual Cash flow=Annual Benefit-Annual M&O Cost-Annual M&O gradient

489900

2767935

P.V=Cash Flow*Annuity Factor(10 years and 12%)

Loan Payment

-225565

-1274442.25

P.V=Loan Payment*Annuity Factor(10 years and 12%)

Salvage Value

205000

66004.5

P.V=Salvage Value/1.12^10

Net Present Value

965497.2635

.

Alternative 3

Items

Cash Flow

P.V

Comments

First Cost

-1650000

Down Payment

-495000

-495000

30% of First Cost

Annual Cash flow=Annual Benefit-Annual M&O Cost-Annual M&O gradient

342020

1932413

P.V=Cash Flow*Annuity Factor(10 years and 12%)

Loan Payment

-187971

-1062036.15

P.V=Loan Payment*Annuity Factor(10 years and 12%)

Salvage Value

178000

57311.2

P.V=Salvage Value/1.12^10

Net Present Value

432688.0861

From Above Alternative 2 has highest NPV ($965497) thus Alternative 2 should be purchased

Items

Cash Flow

P.V

Comments

First Cost

-1325000

Down Payment

-397500

-397500

30% of First Cost

Annual Cash flow=Annual Benefit-Annual M&O Cost-Annual M&O gradient

167700

947505

P.V=Cash Flow*Annuity Factor(10 years and 12%)

Loan Payment

-150946

-852844.9

P.V=Loan Payment*Annuity Factor(10 years and 12%)

Slavage Value

145000

46686.1

P.V=Salvage Value/1.12^10

Net Present Value

-256153.7807

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