As the budget director for a town in the northern United States, you need to pur
ID: 2739248 • Letter: A
Question
As the budget director for a town in the northern United States, you need to purchase new
snow plowing equipment before the next winter season. You sent out a request for proposal
(RFP) and three companies gave you information on their plows – including purchase costs
and annual operating maintenance expenses. Venus Corporation’s proposal costs $400,000,
and $100,000 annually for 5 years Mars Corporation’s proposal costs $500,000, and
$75,000 annually also for 5 years and Jupiter Company’s proposal costs $300,000 and
$125,000 annually for 5 years. The town uses a cost of capital of 6%.
Which company’s proposal should you accept?
A. Venus Company
B. Mars Corporation
C. Jupiter Company
Explanation / Answer
Present value of cash Outflows for all projects:
Present Value of Annuity factors for 5 years@6%=1/1.06+1/1.062++1/1.063++1/1.064++1/1.065=4.2124
A.Venus Company
Present value of cash Outflows=Intial cost+operating maintenance*Present Value of Annuity factors for 5 years@6% =$400,000+$100,000*4.2124=$400,000+$421,240=$821,240
B. Mars Corporation
Present value of cash Outflows=Intial cost+operating maintenance*Present Value of Annuity factors for 5 years@6% =$500,000+$75,000*4.2124=$500,000+$315,930=$815,930
C. Jupiter Company
Present value of cash Outflows=Intial cost+operating maintenance*Present Value of Annuity factors for 5 years@6% =$300,000+$125,000*4.2124=$300,000+$526,550=$826,550
Mars Corporation proposal should supposed to be accept, because it has less present value cash outflows.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.