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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 2 years ago
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