In a company’s renovation of a small office building, two feasible alternatives
ID: 341235 • Letter: I
Question
In a company’s renovation of a small office building, two feasible alternatives for upgrading the heating, ventilation, and air conditioning (HVAC) system have been identified. Either Alternative A or Alternative B must be implemented. The costs are as follows:
Alternative A:
Rebuild (overhaul) the existing HVAC
•Equipment,labor,and material store build.............$18,000
•Annual cost of electricity..................................... $32,000
•Annual maintenance expenses .............................$2400
Alternative B:
Install a new HVAC system that utilizes existing ductwork
• Equipment, labor, and materials to install ............ $ 60,000
•Annual cost of electricity........................................ $ 9000
•Annual maintenance expenses ...............................$16,000
.Replacement of a major component at EOY (4).......$9400
At the end of eight years, the estimated market value for Alternative A is $2,000 and for Alternative B it is $8,000. Assume that both alternatives will provide comparable service (comfort) over an eight-year period, and assume that the major component replaced in Alternative B will have no market value at EOY eight.
(1) Draw net cash flow for each alternative.
(2) Use a cash-flow table and end-of-year convention to tabulate the net cash flows for both alternatives.
(3) Determine the annual net cash-flow difference between the alternatives (B A).
Explanation / Answer
Answer:
Assumption : Since no market rate of return is mentioned in the question, let 5% be the market rate of return.
(1) & (2)
(3) Annual net cash flow difference between alternative (B-A) = $ (223768 - 238864) = $ -15096