an oirl company plans to purchase a large piece of vacant land for $70000. There

Question

an oirl company plans to purchase a large piece of vacant land for $70000. There are four possible improvements over and above the cost of the land:

A. Cost of $75000 Conventional service station

B.Cost of $230,000 Automatic car wash with pumps

C.Cost of $30000 Discount self-service only

D.Cost of $130,000 Serivce station with quick car wash

In each case the estimated useful life is 15 years and salvage value is the cost of the land, The net annual income, afterpaying all operating expenses is projected at:

A.$23300 B.$44300 C.$10000 D.27500

If the company requires a 10% rate of return, what should they do?

Find PW Cost, EUAB, Savage, PW benefit+ PW salvage, (PW benefit+PW salvage)- PW cost for each of the possible improvements.

Explanation / Answer

Conventional Automatic car Discount SS with quick service station wash self service car wash Initial cost: land 70000 70000 70000 70000 improvement 75000 230000 30000 130000 Total initial cost 145000 300000 100000 200000 annual savings 23300 44300 10000 27500 salvage value 70000 70000 70000 70000 pvif @ 10% for 15 yrs 0.2394 0.2394 0.2394 0.2394 pvifa @ 10% for 15 yrs 7.6061 7.6061 7.6061 7.6061 pv of annual savings 177222 336950 76061 209168 pv of salvage value 16758 16758 16758 16758 total pv of inflows 193980 353708 92819 225926 less: Initial cost 145000 300000 100000 200000 NPV 48980 53708 -7181 25926 EUAB = NPV/7.6061 6440 7061 -944 3409 The company should opt for the Automatic Car Wash with pumps as it has higher NPV and higher EUAB.

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