Question

Show all working and formulas used whether on excel or paper. Answer all parts

The project management team is evaluating proposals from their engineering staff. The staff has proposed two mutually exclusive project options (meaning only one project can be selected).

Option B – “Midsize Capacity”
Initial Investment	$60,000
Operating & Maintenance (Annual)	$ 7,000
Salvage Value	$ 8,000
Life-span	4 Years

Option C – “Large Capacity”
Initial Investment	$140,000
Operating & Maintenance (Annual)	$ 12,000
Salvage Value	$ 24,000
Life-span	6 Years

  
Each option represents a new direction for the company and as such the initial revenues from sales of product will have to be developed but once the product market is established we expect to be able to maintain sales revenues at the level of capacity that each option provides. Thus, the revenues will increase (ramp) during the first three years to a steady-state condition starting at the end of year three Revenues are expected to steady-state as long as production is continued.

The project management team uses a MARR rate of 6.00%.

The production revenues for each option are:

Production Revenue (Years 1 & 2) & Steady-State Production (Year 3+)

Year	Option B	Option C
0	-	-
1	$10,000 / yr	$10,000 / yr
2	$20,000 / yr	$25,000 / yr
3	$30,000 / yr	$50,000 / yr
Years (3+)	$30,000 / yr	$50,000 / yr

Questions:

1. Draw Cash flow diagrams OR provide a clear table showing an appropriate planning horizon for comparing the options and the cash flows for each.
2. Based on a LCM planning horizon the NPV for option B is  and the NPV for option C is
3. The corresponding AW for Option B is  and the AW for Option C is .
4. Based on the analysis which project would be recommended?

Answer 1

Answer:

NPV of option B = - $1733.72, AW of option B = - $500.34

NPV of option C = $3791.61, AW of option C = $771.07

NPV of B < NPV of C, hence option C (Large Capacity) should be selected.

Find full solution below.