Question

A project engineer was given the assignment to determine which model of a new excavator the company should purchase based on an interest rate of 10 percent per year.

Model A - will cost $100,000 to purchase (year 0) and will generate $15,000 income each year for next 10 years (years 1-10)

Model B- will cost $150,000 to purchase (year 0) and will generate $20,000 income each year for next 10 years (years 1-10)

A) Draw the cash flow diagram for Model B

B) Based on net present value (time zero) of the income and expense, which model should the engineer recommend?

Answer 1

a. Cash flow diagram attachedb.

Model A
Year	CF	PVF@10%	Disc CF
0	$ -1,00,000.00	1	$ -1,00,000.00
1	$      15,000.00	0.9091	$      13,636.36
2	$      15,000.00	0.8264	$      12,396.69
3	$      15,000.00	0.7513	$      11,269.72
4	$      15,000.00	0.6830	$      10,245.20
5	$      15,000.00	0.6209	$        9,313.82
6	$      15,000.00	0.5645	$        8,467.11
7	$      15,000.00	0.5132	$        7,697.37
8	$      15,000.00	0.4665	$        6,997.61
9	$      15,000.00	0.4241	$        6,361.46
10	$      15,000.00	0.385543	$        5,783.15
NPV	$      -7,831.49

Model B
Year	CF	PVF@10%	Disc CF
0	$ -1,50,000.00	1	$ -1,50,000.00
1	$      20,000.00	0.9091	$      18,181.82
2	$      20,000.00	0.8264	$      16,528.93
3	$      20,000.00	0.7513	$      15,026.30
4	$      20,000.00	0.6830	$      13,660.27
5	$      20,000.00	0.6209	$      12,418.43
6	$      20,000.00	0.5645	$      11,289.48
7	$      20,000.00	0.5132	$      10,263.16
8	$      20,000.00	0.4665	$        9,330.15
9	$      20,000.00	0.4241	$        8,481.95
10	$      20,000.00	0.3855	$        7,710.87
NPV	$    -27,108.66

NPV of the both models are Negative, neither of the projects has to be selected

Pls do rate, if the answer is correct and comment, if any further assistance is required