Three alternatives have the following cost and annual benefit data associated wi
ID: 1208962 • Letter: T
Question
Three alternatives have the following cost and annual benefit data associated with them:
Data
Alt. 1
Alt. 2
Alt .3
Useful Life, Years
10
10
10
First Cost
$1,325,000
$1,980,000
$1,650,000
Annual Benefit
265,000
589,000
435,000
Annual M&O Costs
95,000
97,000
91,000
AnnualM&O Gradient
2,300
2,100
1,980
Salvage Value
145,000
205,000
178,000
Loan Payment
150,946
225,565
187,971
The loan payments are calculated using an interest rate of 10%, a life equal to the life of the machine, and a down payment of 30%. Use a MARR of 12% and determine which machine, if any, should be purchased. Use incremental rate of return for your analysis. Do not forget to use DN in the analysis
Data
Alt. 1
Alt. 2
Alt .3
Useful Life, Years
10
10
10
First Cost
$1,325,000
$1,980,000
$1,650,000
Annual Benefit
265,000
589,000
435,000
Annual M&O Costs
95,000
97,000
91,000
AnnualM&O Gradient
2,300
2,100
1,980
Salvage Value
145,000
205,000
178,000
Loan Payment
150,946
225,565
187,971
Explanation / 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%)
Salvage Value
150946
48600.6
P.V=Salvage Value/1.12^10
Net Present Value
-254239.3278
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%)
Salvage Value
150946
48600.6
P.V=Salvage Value/1.12^10
Net Present Value
-254239.3278
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