Question

At least two alternative investment decisions A and B refer to a ten-year investment horizon. Option A has an initial investment cost of 100,000 Euros, annual maintenance costs of 10,000 Euros and expected annual revenue of 25,000 Euros, and there is a resale value of 20,000 Euros at the end of 10 years. Solution B will require an initial investment of 120,000 Euros, will have an annual maintenance cost of 20,000 Euros and an expected annual revenue of 35,000 Euros, and now the resale value at the end of 10 years is estimated at 40,000 Euros. For a 5% bargain cost and no taxes calculated on the problem, answer the following questions:

) Which solution is more advantageous to the original data of the problem? Make the relevant financial schedules and solve the problem both with present value and annual value, with individual calculations but also with marginal analysis (PWA, PWB, PWB-A, AWA, AWB, AWB-A)

2) How does the decision change if solution A has 5 years and B has 10 years? Say how you will work with the present value and how with the annual value.

Answer 1

OPTION A

	Net Cash Inflow= Revenue - Maintanence Cost = (25000-10000)
Year	Cash Flow	PV Cash Flow
0(Initial Investment)	-100000				Discounting Factor = 5%
1	15000	14285.71429
2	15000	13605.44218
3	15000	12957.56398
4	15000	12340.53712
5	15000	11752.8925
6	15000	11193.23095
7	15000	10660.21995
8	15000	10152.59043
9	15000	9669.133743
10	35000(20K resale value + 15K)	21486.96387
	total =	128104.289
	NPV=	28104.28901(128104.289-100000)

OPTION B

	Net Cash Inflow= Revenue - Maintenence Cost = (35000-20000)
Year	Cash Flow	PV Cash Flow
0(Initial Investment)	-120000				Discounting Factor = 5%
1	15000	14285.71
2	15000	13605.44
3	15000	12957.56
4	15000	12340.54
5	15000	11752.89
6	15000	11193.23
7	15000	10660.22
8	15000	10152.59
9	15000	9669.134
10	55000	33765.23
	total =	140382.6
	NPV=	20382.55

Clearly Option A is better.