3. A company is buying equipment for a project th at will last for 12 years. The

Question

3. A company is buying equipment for a project th at will last for 12 years. There are 3 alternatives. 1-6% Original cost 50,000. Salvage Value at the end of 6 years is revenue is 20,000 per year. Original cost 30,000. Salvage Value at the end of 4 years is 3000. Operating cost per year 5,000 and (A) 4000. Operating cost per year 10,000 and (B) revenue is 8000 Original cost is 20,000. Salvage Value at the end of 3 years is 2000. Operating cost per year 4000 (C) and revenue is 7000. If we use the Least Common Multiple Approach and assume we replace exactly the same equipment at the same price at the end of each Salvage Cycle, Show a diagram of the cash flow of each alternative. What is the present worth of each alternative?

Explanation / Answer

Option A Year Equipment Cost Revenue Operating Cost Savlage Value Total cash Flow for the year 0 $              (50,000) $       (50,000) 1 $        20,000 $       (10,000) $         10,000 2 $        20,000 $       (10,000) $         10,000 3 $        20,000 $       (10,000) $         10,000 4 $        20,000 $       (10,000) $         10,000 5 $        20,000 $       (10,000) $         10,000 6 $              (50,000) $        20,000 $       (10,000) $        4,000 $       (36,000) 7 $        20,000 $       (10,000) $         10,000 8 $        20,000 $       (10,000) $         10,000 9 $        20,000 $       (10,000) $         10,000 10 $        20,000 $       (10,000) $         10,000 11 $        20,000 $       (10,000) $         10,000 12 $        20,000 $       (10,000) $        4,000 $         14,000 NPV $3,205.78 Option B Year Equipment Cost Revenue Operating Cost Savlage Value Total cash Flow for the year 0 $       (30,000) $       (30,000) 1 $          8,000 $       (5,000) $            3,000 2 $          8,000 $       (5,000) $            3,000 3 $          8,000 $       (5,000) $            3,000 4 $       (30,000) $          8,000 $       (5,000) $        3,000 $       (24,000) 5 $          8,000 $       (5,000) $            3,000 6 $          8,000 $       (5,000) $            3,000 7 $          8,000 $       (5,000) $            3,000 8 $       (30,000) $          8,000 $       (5,000) $        3,000 $       (24,000) 9 $          8,000 $       (5,000) $            3,000 10 $          8,000 $       (5,000) $            3,000 11 $          8,000 $       (5,000) $            3,000 12 $          8,000 $       (5,000) $        3,000 $            6,000 NPV ($39,324.74) Option C Year Equipment Cost Revenue Operating Cost Savlage Value Total cash Flow for the year 0 $              (20,000) $ (20,000) 1 $          7,000 $        (4,000) $      3,000 2 $          7,000 $        (4,000) $      3,000 3 $              (20,000) $          7,000 $        (4,000) $    2,000 $ (15,000) 4 $          7,000 $        (4,000) $      3,000 5 $          7,000 $        (4,000) $      3,000 6 $              (20,000) $          7,000 $        (4,000) $    2,000 $ (15,000) 7 $          7,000 $        (4,000) $      3,000 8 $          7,000 $        (4,000) $      3,000 9 $              (20,000) $          7,000 $        (4,000) $    2,000 $ (15,000) 10 $          7,000 $        (4,000) $      3,000 11 $          7,000 $        (4,000) $      3,000 12 $          7,000 $        (4,000) $    2,000 $      5,000 NPV ($30,482.21)

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