National Seafoods is planning an expansion to a cold storage facility. Three dif

Question

National Seafoods is planning an expansion to a cold storage facility. Three different design and size alternatives are being considered. Cash flows asociated with the proposals are given below: Proposal Proposal A Proposal B Initial Costa: $350,000 $400,000 $350,000 Land $485,000 Buildings and Machinery $700,000 $835,000 Bnergy Costs; S& SO4 1,18 Soos 1.050.000 First your $ 65,000 $ 48,000 $ 65,000 Inoronse onch additional year* $ 3,000 $ 2,000 $ 3,500 Maintenance Costs** $ 20,000 $ 15,000 $ 50,000 Annual Contribution** $250,000 $ 260,000 $265,000 Assumptions: • MARR is 10% Use a 10 year life in your analysis. *This amount represents the increase for onch year. So, for example, energy cos for proposal A will be 65,000 in your 1, 68,000 in year 2, 71,000 in your 3, ote: ** The annual maintenance costs given above romain constant over the life of the project *** The annual contribution represents tho additional (positive) cash flow that will result after deduoting all cash expenditures except for the energy and maintenance costs given above. This contribution also stays constant for each yoar, The land will retain its original value at the end of 10 years while the buildinga and machinery will have no value. • Ignore taxes. quired: ng the not present worth approach, determine which (if any) proposal should be Septed.

Explanation / Answer

None of the Proposal should be Accepted as NPV is negative for all projects

Calculation of NPV Paticulars Amount Proposal A Proposal B Proposal C Annual Contribution 250000 260000 265000 Less: Maintenance Cost -20000 -15000 -50000 Less: Basic Energy Cost -65000 -48000 -65000 Less: Depreciation on Building (Life 10 Years) -70000 -83500 -48500 (700,000/10) (835,000/10) (485,000/10) Net Contribution before energy Increase 95000 113500 101500 MARR = 10% , Life = 10Years Calculation of Discounted Cash flow for 10 Years Project A Years Net Contribution Discounting Factor Discounted Cash Flow 1 95000 0.9091            86,363.64 2 92000 0.8264            76,033.06 3 89000 0.7513            66,867.02 4 86000 0.6830            58,739.16 5 83000 0.6209            51,536.47 6 80000 0.5645            45,157.91 7 77000 0.5132            39,513.18 8 74000 0.4665            34,521.55 9 71000 0.4241            30,110.93 10 68000 0.3855            26,216.94          515,059.85 Less : Intial Cost      1,050,000.00 NET PRESENT VALUE        (534,940.15) Profit Decreases by 3000 Every year due Increase in Energy Project B Years Net Contribution Discounting Factor Discounted Cash Flow 1 113500 0.9091          103,181.82 2 111500 0.8264            92,148.76 3 109500 0.7513            82,268.97 4 107500 0.6830            73,423.95 5 105500 0.6209            65,507.20 6 103500 0.5645            58,423.05 7 101500 0.5132            52,085.55 8 99500 0.4665            46,417.48 9 97500 0.4241            41,349.52 10 95500 0.3855            36,819.38          651,625.68 Less: Intial Cost      1,185,000.00 NET PRESENT VALUE        (533,374.32) Profit Decreases by 2000 Every year due Increase in Energy Project C Years Net Contribution Discounting Factor Discounted Cash Flow 1 101500 0.9091            92,272.73 2 98000 0.8264            80,991.74 3 94500 0.7513            70,999.25 4 91000 0.6830            62,154.22 5 87500 0.6209            54,330.62 6 84000 0.5645            47,415.81 7 80500 0.5132            41,309.23 8 77000 0.4665            35,921.07 9 73500 0.4241            31,171.17 10 70000 0.3855            26,988.03          543,553.86 Less: Intial Cost          885,000.00 NET PRESENT VALUE        (341,446.14) Profit Decreases by 3000 Every year due Increase in Energy Comparision Project NPV

None of the Proposal should be Accepted as NPV is negative for all projects

A (534,940.15) B (533,374.32) C (341,446.14)

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