Present Value of Costs The Aubey Coffee Company is evaluating the within-plant d
ID: 2763405 • Letter: P
Question
Present Value of Costs 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 11%, and the projects' expected net costs are listed in the table: 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
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 $
Explanation / Answer
Conveyor Years 0 1 2 3 4 5 Total Net Cost-(a) 500000 120000 120000 120000 120000 20000 Discount factor @11%-(b) 1 0.901 0.812 0.731 0.659 0.593 Present value of cost-(a)*(b) 500000 108108 97395 87743 79048 11869 884163 Forklift Years 0 1 2 3 4 5 Net Cost-(a) 200000 160000 160000 160000 160000 60000 Discount factor @11%-(b) 1 0.901 0.812 0.731 0.659 0.593 Present value of cost-(a)*(b) 200000 144144 129860 116991 105397 35607 731998 Conveyor Forklift Present value of cost ($) 884163 731998