The Aubey Coffee Company is evaluating the within-plant distribution system for

Question

The Aubey Coffee Company is evaluating the within-plant distribution system for its new roasting, grinding, and packing plant. The two alternatives are (1) a conveyor system with a high initial cost, but low annual operating costs, and (2) several forklift trucks, which cost less but have considerably higher operating costs. The decision to construct the plant has already been made, and the choice here will have no effect on the overall revenues of the project. The cost of capital for the plant is 9%, and the projects' expected net costs are listed in the table:

What is the IRR of each alternative?
Method 1 _________________   

Method 2 _________________

What is the present value of costs of each alternative? Round your answers to the nearest dollar, if necessary. Enter your answers as a whole numbers. For example, do not enter 1,000,000 as 1 million.

Method 1 $   ________   

Method 2 $   ________   

Which method should be chosen?
_________________

EXPECTED NET COST Year Conveyor Forklift 0 -$500,000 -$200,000 1 -120,000 -160,000 2 -120,000 -160,000 3 -120,000 -160,000 4 -120,000 -160,000 5 -20,000 -160,000

Explanation / Answer

Conveyor Forklift Year PVf @ 9% CASH OUTFLOW PVCO CASH OUTFLOW PVCO 0            1.0000 ($500,000) ($500,000) ($200,000) ($200,000) 1            0.9174 -120,000 ($110,092) -160,000 ($146,789) 2            0.8417 -120,000 ($101,002) -160,000 ($134,669) 3            0.7722 -120,000 ($92,662) -160,000 ($123,549) 4            0.7084 -120,000 ($85,011) -160,000 ($113,348) 5            0.6499 -20,000 ($12,999) -160,000 ($103,989) PV CO ($901,765) ($822,344) Present calue of cash outflow Fro conveyor $901,765 For Forklft $822,344 Forklift should be chosenhaving lower pvco

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