Question

Present Value of Costs

The Aubey Coffee Company is evaluating the within-plant distribution system for its new roasting, grinding, and packing plant. The two alternatives are (1) a conveyor system with a high initial cost but low annual operating costs and (2) several forklift trucks, which cost less but have considerably higher operating costs. The decision to construct the plant has already been made, and the choice here will have no effect on the overall revenues of the project. The cost of capital for the plant is 11%, and the projects' expected net costs are listed in the following table:

	Expected Net Cost
Year	Conveyor		Forklift
0	-$500,000		-$200,000
1	-120,000		-160,000
2	-120,000		-160,000
3	-120,000		-160,000
4	-120,000		-160,000
5	-20,000		-160,000

1. What is the IRR of each alternative?

   The IRR of alternative 1 is -Select-undefined             9%                            11%                            13%             Item 1 .

   The IRR of alternative 2 is -Select-undefined             9%                            11%                            13%             Item 2 .

2. What is the present value of costs of each alternative? Do not round intermediate calculations. Round your answers to the nearest dollar. Use a minus sign to enter negative values, if any.

   Alternative 1: $  

   Alternative 2: $  

   Which method should be chosen?

Answer 1

Based on the given data, pls find below:

Since all the cash flows are negtive, the IRR cannot be defined - Undefined

Based on the NPV method, the NPV of Fork Lift is higher than the Conveyor and hence Fork Lift should be chosen;

YEAR	0	1	2	3	4	5	IRR%
Conveyor	-5,00,000	-1,20,000	-1,20,000	-1,20,000	-1,20,000	-20,000	#NUM!
Fork Lift	-2,00,000	-1,60,000	-1,60,000	-1,60,000	-1,60,000	-1,60,000	#NUM!
Discounting Factor		11.0%
YEAR	0	1	2	3	4	5
Discounting Factor	1.0000	0.9009	0.8116	0.7312	0.6587	0.5935
Discounted Cash Flow							NPV
Conveyor	-5,00,000	-1,08,108	-97,395	-87,743	-79,048	-11,869	-8,84,162.51
Fork Lift	-2,00,000	-1,44,144	-1,29,860	-1,16,991	-1,05,397	-94,952	-7,91,343.52