You are a project engineer and you have to make a choice between two contractors

Question

You are a project engineer and you have to make a choice between two contractors to perform some rebuilding work on a manufacturing facility. One contractor proposes that he will do the work for $1,300,000 payable immediately. The other contractor proposes that he will perform the same job for $1,400,000 payable in eight equal quarterly payments, starting 3 months after the job begins. A nominal rate of 14% should be used as the MARR.What equivalent annual interest rate is the second contractor offering? Which contractor

Explanation / Answer

equivalent annual interest rate the second contractor is offering = (1+14%/4)^4 -1 =14.75% NPV of second option installment amount = 1,400,000/8 =$175000 Present value of payments = 175000/(1+14%/4) + 175000/(1+14%/4)^2 + 175000/(1+14%/4)^3 + 175000/(1+14%/4)^4 + 175000/(1+14%/4)^5 + 175000/(1+14%/4)^6 + 175000/(1+14%/4)^7 + 175000/(1+14%/4)^8 =$1,202,942.22 Present value of second contractor's offering is less. Hence you should accept second contractor

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

---

---

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