2. (20 points) The production manager of a plant is considering four mutually ex

Question

2. (20 points) The production manager of a plant is considering four mutually exclusive proposals to improve the production activities in his plant. The estimated initial investment and annual revenues are as shown below. If the proposals are all expected to have a life of eight years with no salvage value, use the rate of return criteria with a MARR of 15% to determine which alternative should be selected. Assume that all alternatives have in internal rate greater than MARR Alternative Initial Cost Net Annual Income $5,000 $1,006 $10,000 $5.312 $15,000 $6,209

Explanation / Answer

PROJECT A B C

NET ANNUAL INCOME $1006 $5312 $6209

ANNUITY FACTOR 8 YEARS @15%   4.487 4.487 4.487 PRESENT VALUE OF ANNUAL INCOME $4514 $23835 $27860

(LESS) INITIAL COST ($5000) ($10000) ($15000) NET PRESENT VALUE $(486) $13835 $12860

HENCE NPV OF ALTERNATIVE B IS HIGH HENCE ALTERNATIVE B IS SELECTED.

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