Questian C- 2o oints alternatives have the following cost and annual benefit dat
ID: 2592213 • Letter: Q
Question
Questian C- 2o oints alternatives have the following cost and annual benefit data associa Alt. 1 10 Data 3 Alt. 2 10 $1,980,000 589,000 97,000 2,100 205,000 225,565 Alt . 10 $1,650,000 435,000 91,000 1,980 Useful Life, Years First Cost Annual Benefit25,000 Annual M&O; Costs 95,000 Annual M&O; Gradient 2,300 265,000 Salvage Value 178,000 145,000 150,946 Loan Payment 187,971 using an interest rate of 10%, a life equal to the life ofthe machine use a MARR of 12% and determine which machine, if any, s The loan payments are calculated and a down payment of 30%. be purcha Use ineremental rate of return for your analysisExplanation / Answer
Calculation of Net present value of all the three alternatives
As the NPV of Alt. 1 is -ve, therefore it should be rejected. The remaining two alternatives should be compare based on incremental rate of return.
Incremental rate of return on Alt. 2 = Incremental NPV/Incremental Investment
= (965,503-432,693)/(1,980,000-1,650,000) = (532,810/330,000)*100 = 161.46%
As there is an incremental rate of return of 161.46% on Alt. 2 over Alt. 3, Alt. 2 should be accepted.
Particulars Alt. 1 Alt. 2 Alt. 3 Annual Benefit 265,000 589,000 435,000 Less: Annual M&O costs (95,000) (97,000) (91,000) Less: Annual M&O gradient (2,300) (2,100) (1,980) Net Annual Benefit (a) 167,700 489,900 342,020 PVAF(10 yrs,12%) (b) 5.650 5.650 5.650 Present value of annual banefit (c = a*b) 947,505 2,767,935 1,932,413 Present value of salvage value (Salvage value*PVF(10 yrs,12%) (d) (145,000*0.322) = 46,690 (205,000*0.322) = 66,010 (178,000*0.322) = 57,316 Present value of loan payments (e) (150,946*5.65) = 852,845 (225,565*5.65) = 1,274,442 (187,971*5.65) = 1,062,036 Down payments (30% of cost) (f) 397,500 594,000 495,000 Net Present Value (c+d-e-f) (256,150) 965,503 432,693