Question

Quantum Logistics, Inc., a wholesale distributor, is considering the construction of a new warehouse to serve the southeastern geographic region near the Alabama–Georgia border. There are three cities being considered. After site visits and a budget analysis, the expected income and costs associated with locating in each of the cities have been determined. The life of the warehouse is expected to be 12 years and MARR is 15%/year. City Initial Cost Net Annual Income Lagrange $1,260,000 $480,000 Auburn $1,000,000 $410,000 Anniston $1,620,000 $520,000 a. What is the present worth of each site? b. What is the decision rule for determining the preferred site based on present worth ranking? c. Which city should be recommended?

I need help for B and C if possible please

Answer 1

(a)

Given

Annual worth of Project = Net Income A - Annual Equivalent for initial cost

Annual Equivalent for Initial cost = P* r/(1-(1+r)^-N)

Where P=initial Investment

r=rate of return

N= Number of years

for Lagrange

P=1,260,000

A=480,000

r=15%

N=12 years

Annual worth of Project = A - P* r/(1-(1+r)^-N)

Annual Worth =480,000 - 1,260,000*15%/(1-(1+15%)^-12)= $247,554

for Auburn

P=1000000

A=410000

r=15%

N=12 years

Annual worth of Project = A - P* r/(1-(1+r)^-N)

Annual Worth =410,000-1,000,000*15%/(1-(1+15%)^-12)= $225,519

for Anniston

P=1,620,000

A=$520000

r=15%

N=12 years

Annual worth of Project = A - P* r/(1-(1+r)^-N)

Annual Worth =520,000-1,620,000*15%/(1-(1+15%)^-12)= $221,141

(b) based on the NPV RANKING site with the highest NPV is preffered therefore site which has the highest Present value is given precedence over the other

(c)

LAGRANGE with Present worth of 247,554 should be given precedence with respect to other projects and should

be recommended