Question

In: Finance

There are three mutually exclusive alternatives, as vendors to outsource a project, with the following cash...

There are three mutually exclusive alternatives, as vendors to outsource a project, with the following cash flow and useful life. Which of these three alternatives would you recommend to be selected? The MARR is 10% per year.

Vendor 1

Vendor 2

Vendor 3

First Cost

$60,000

$35,000

$25,000

Annual operating and maintenance cost

$3,000 every 4 years

$1,000 per year

$2,000 in yr 1 and it increases by $200 every year thereafter

Salvage value

$10,000

$4,000

$3,000

Useful life, years

8

2

4

Solutions

Expert Solution

Answer-

We have to calculate NPV of all the three alternatives and the alternative with the highest NPV should be selected.

Vendor 1

NPV = - $ 60000 - $ 3000 / 1.104 - $ 3000 / 1.108 + $ 10000 / 1.088

NPV = - $ 60000 - $ 3000 / 1.464 - $ 3000 / 2.143 + $ 10000 / 2.143

NPV = - $ 60000 - $ 2049.2 - $ 1399.9 + $ 4666.35

NPV = - $ 58782.75

Vendor 2

NPV = - $ 35000 - $ 1000 / 1.10 - $ 1000 / 1.102 + $ 4000 / 1.12

NPV = - $ 35000 - $ 1000 /1.10 - $ 1000 / 1.21 + $ 4000 / 1.21

NPV = - $ 35000 - 909.09 - $ 826.45 + $ 3305.78

NPV = - $ 33429.76

Vendor 3

NPV = - $ 25000 - $ 2000 / 1.1 - $ 2200 / 1.12 - $ 2400 / 1.13 - $ 2600 / 1.14 + $ 3000 / 1.14

NPV = - $ 25000 - $ 2000 /1.10 - $ 2200 / 1.21 - $ 2400 / 1.331 - $ 2600 / 1.464 + $ 3000 / 1.464

NPV = - $ 25000 - $ 1818.18 - $ 1818.18 - $ 1803.15 - $ 1775.96 + $ 2049.18

NPV = - $ 30166.29

Alternative or Vendor 3 has the highet NPV therefore Alternativeor Vendor 3 should be selected

jeff jeffy answered 3 years ago
Next > < Previous

Related Solutions

Consider the following three mutually exclusive investment project alternatives (A, B, C). Use the annual worth...
Consider the following three mutually exclusive investment project alternatives (A, B, C). Use the annual worth analysis (AW) to determine the best investment alternative assuming MARR=15%. Project name:                                        A                    B                    C Cash Flow (Year 0):                                    -200,000        -300,000        -400,000 Cash Flow (Year 1-N)                     +150,000       +180,000       +150,000 Salvage value at year N:                +30,000         +50,000          +60,000 Project Life (N):                                    2 years         3 years          6 years
Three mutually exclusive design alternatives are being considered. The estimated cash flows for each alternative are...
Three mutually exclusive design alternatives are being considered. The estimated cash flows for each alternative are given below. The MARR is 12​% per year. At the end of the useful​ life, the investment will be sold. A​ decision-maker can select one of these alternatives or decide to select none of them. Make a recommendation using the PW method. X Y Z Investment cost ​$275,000 ​$140,000 ​$370,000 Annual revenue ​$85,840 ​$53,207 ​$93,911 Annual cost ​$23,183 ​$14,370 ​$20,543 Useful life 15 years...
Three mutually exclusive investment alternatives are being considered. The estimated cash flows for each alternative are...
Three mutually exclusive investment alternatives are being considered. The estimated cash flows for each alternative are given below. The study period is 30 years and the​ firm's MARR is 17% per year. Assume repeatability and reinvestment of positive cash balances at 17​% per year. a. What is the simple payback period for Alternative​ 1? b. What is the annual worth of Alternative​ 2? c. What is the IRR of the incremental cash flows of Alternative 2 compared to Alternative​ 1?...
Three mutually exclusive investment alternatives are being considered. The estimated cash flows for each alternative are...
Three mutually exclusive investment alternatives are being considered. The estimated cash flows for each alternative are given below. The study period is 30 years and the​ firm's MARR is 10​% per year. Assume repeatability and reinvestment of positive cash balances at 10​% per year. a. What is the simple payback period for Alternative​ 1? b. What is the annual worth of Alternative​ 2? c. What is the IRR of the incremental cash flows of Alternative 2 compared to Alternative​ 1?...
The cash flows for four mutually exclusive alternatives are provided in the table below. If the...
The cash flows for four mutually exclusive alternatives are provided in the table below. If the useful life is 10 years for each alternative, find the best alternative using incremental rate of return analysis. MARR = 10% P Q R S Initial Cost 19,000 16,000 11,000 8,500 EUAB 3,500 3,100 2,200 1,350 A. Alt. S B. Alt. P C. Alt. Q D. Alt. R
A company has the following mutually exclusive investment alternatives. The cash flows are shown below. Year...
A company has the following mutually exclusive investment alternatives. The cash flows are shown below. Year Project A Project B 0 -$1,000 -$1,000 1 600 300 2 600 600 3 600 900 If the cost of capital is 10%, which investment(s) should the company select? Both Project A and Project B Project B with a NPV of $444.78 Project B with a NPV of $276.31 Project A with a NPV of $493.11 Project A with a NPV of $253.64
A firm has two $1,000, mutually exclusive investment alternatives with the following cash inflows. The cost...
A firm has two $1,000, mutually exclusive investment alternatives with the following cash inflows. The cost of capital is 6 percent. Year Cash Inflow A B 1 $175 $1,100 2 175 - 3 175 - 4 175 - 5 175 - 6 175 - 7 175 - 8 175 - a. What is the internal rate of return on each investment? Which investment should the firm make? b. What is the net present value of each investment? Which investment should...
There are three mutually exclusive alternatives being considered.  One of the three must be selected, so this...
There are three mutually exclusive alternatives being considered.  One of the three must be selected, so this is a set of three cost alternatives.  MARR is 15% and the life of each project is 12 years.  These projects are: Project I Capital Cost: $130,000 Revenue/Savings: 22,000 Expense/Cost: $12,000 Salvage: $25,000 Project II Capital Cost: $100,000 Revenue/Savings: $10,000 Expense/Cost: $15,000 Salvage: $20,000 Project III Capital Cost: $160,000 Revenue/Savings: $10,000 Expense/Cost: $20,000 Salvage: $40,000 please solve asap, thank you!
A firm is considering three mutually exclusive alternatives aspart of a production improvement program. The...
A firm is considering three mutually exclusive alternatives as part of a production improvement program. The alternatives are as follows:A                         B                            CInstalled Cost ($)                                   10,000                 15,000                 20,000Uniform Annual benefit ($)                    1,625            1,625                  2000Useful life (Years)                                 20                 20                       20         For each alternative, the salvage value is zero. The MARR is 6%. Which alternative should be selected based on the INCREMENTAL ANALYSIS method?
A firm is considering three mutually exclusive alternatives as part of a production improvement program. The...
A firm is considering three mutually exclusive alternatives as part of a production improvement program. The alternatives are: A B C installed cost $10,000 $15,000 $20,000 annual benefit 1,625 1,530 1,890 useful life (yrs) 10 20 20 The salvage value of each alternative is zero. At the end of 10 years, Alternative A could be replaced with another A with identical cost and benefits. (a) which alternative should be selected if interest is 6%? (b) 3% (c) if there is...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT