Question

An American multinational company is now considering two mutually exclusive alternatives for the environmental protection equipment at its manufacturing plant in the United Kingdom. One of these alternatives must be selected. The estimated cash flows for each alternative are listed in the below table.

	Alternative A	Alternative B
Capital investment	£ 20,000	£ 38,000
Annual expenses	£ 5,500	£ 4,000
Market value at end of useful life	£ 1,000	£ 4,200
Useful	5 years	10 years

Assume that the equipment will be needed indefinitely and the firm’s MARR relative to British pound (GBP) is 20% per year.

Suppose the study period is shortened to five years.

If the market value of Alternative B after five years is estimated to be £15,000, which alternative would you recommend? Use 4 decimal places of the compound interest factors to do the calculation. Show detailed steps of your analysis.

Answer 1

Based on the given data, pls find below workings on the NPV of the investment:

YEAR	0	1	2	3	4	5	6	7	8	9	10	11
Alternative A	-20,000	-5,500	-5,500	-5,500	-5,500	-5,500	1,000
Alternative B	-38,000	-4,000	-4,000	-4,000	-4,000	-4,000	-4,000	-4,000	-4,000	-4,000	-4,000	4,200
Discounting Factor		20.0%
YEAR	0	1	2	3	4	5	6	7	8	9	10	11
Discounting Factor	1.0000	0.8333	0.6944	0.5787	0.4823	0.4019	0.3349	0.2791	0.2326	0.1938	0.1615	0.1346
Discounted Cash Flow													NPV
Alternative A	-20,000	-4,583	-3,819	-3,183	-2,652	-2,210	335	-	-	-	-	-	-36,113.47
Alternative B	-38,000	-3,333	-2,778	-2,315	-1,929	-1,608	-1,340	-1,116	-930	-775	-646	565	-54,204.62

The total NPV cash outflow on Alternative A is much lower than that of Alternative B;

If both the Alternatives are restricted to 5 years, then the scenario is as below; Even then, the Net Present Value cash outflow on Alternative A is lower than that of Alternative B

YEAR	0	1	2	3	4	5	6	7	8	9	10	11
Alternative A	-20,000	-5,500	-5,500	-5,500	-5,500	-5,500	1,000
Alternative B	-38,000	-4,000	-4,000	-4,000	-4,000	-4,000	15,000
Discounting Factor		20.0%
YEAR	0	1	2	3	4	5	6	7	8	9	10	11
Discounting Factor	1.0000	0.8333	0.6944	0.5787	0.4823	0.4019	0.3349	0.2791	0.2326	0.1938	0.1615	0.1346
Discounted Cash Flow													NPV
Alternative A	-20,000	-4,583	-3,819	-3,183	-2,652	-2,210	335	-	-	jeff jeffy Next > < Previous Related Solutions An American multinational company is now considering two mutually exclusive alternatives for the environmental protection equipment... An American multinational company is now considering two mutually exclusive alternatives for the environmental protection equipment at its manufacturing plant in the United Kingdom. One of these alternatives must be selected. The estimated cash flows for each alternative are listed in the below table. Alternative A Alternative B Capital investment £ 20,000 £ 38,000 Annual expenses £ 5,500 £ 4,000 Market value at end of useful life £ 1,000 £ 4,200 Useful 5 years 10 years Assume that the equipment... An American multinational company is now considering two mutually exclusive alternatives for the environmental protection equipment... 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