Question

ABC Company is considering the purchase of a new forklift for its flourishing roofing business. The key parameters of the three forklifts under scrutiny (Alpha, Beta and Gamma) are provided below.

Parameters	Alpha	Beta	Gamma
Initial Cost($)	400,000	500,000	550,000
Revenues ($)	230,000 at EOY1 Decreasing by 1% annually thereafter	300,000 at EOY1 increasing by 1000 annually thereafter	330,000 at EOY1 decreasing by 1500 annually thereafter
Operating Costs ($)	105,000 at EOY1 increasing by 2% annually thereafter	214,000 annually	223,000 at EOY1 increasing by 1000 annually thereafter
End-of life salvage value	-10,000	10,000	25,000
Useful life (years)	5	10	10
Industry Standard = 4 years	MARR = 10%	EOY = End of year

8. Based on the simple payback method, Beta’s project balance after 2 years (rounded to the nearest $100) is a) $-327,000; b) $-307,000; c) $-249,900; d) $54,900.

9. Based on the discounted payback method, Gamma’s recovery period (to the nearest half or full year) is a) 7.0 years; b) 7.5; c) 8.5; d) 9.5.

10. Based on the discounted payback method, Alpha’s project balance after 2 years (rounded to the nearest $100) is a) $-225,900; b) $-204,300; c) $65,000; d) $100,800.

11. Based on the discounted payback method, Gamma’s project balance after 3 years (rounded to the nearest $100) is a) $-445,200; b) $-385,600; c) $-195,700; d) $115,900.

12. Beta’s benefit/cost (B/C) ratio (second decimal; no rounding) is a) 0.98; b) 1.03; c) 1.10; d) 1.12.

13. Gamma’s benefit/cost (B/C) ratio (second decimal; no rounding) is a) 0.98; b) 1.03; c) 1.05; d) 1.12.

14. The incremental B/C ratio (second decimal; no rounding) between Alpha and Beta is a) 0.92; b) 0.98; c) 1.02; d) 1.05.

15. The incremental B/C ratio (second decimal; no rounding) between Beta and Gamma is a) 0.95; b) 1.01; c) 1.03; d) 1.11

Answer 1

ans 8

BETA

Amount recovered in the 1st year= 300000-214000= 86000

amount recovered in the second year= (300000+1000) -214000= 87000

total amount recovered in 2 years= 86000 +87000= 173000

amount yet to be recovered= project cost of 500000-173000= $327000 Ans a

Ans 9

PROJECT GAMMA

year	revenue	costs	net cash inflow	PV factor @10%	PV of cash inflows
1	330000	223000	107000	0.909	97263
2	328500	224000	104500	0.826	86317
3	327000	225000	102000	0.751	76602
4	325500	226000	99500	0.683	67958.5
5	324000	227000	97000	0.621	60237
6	322500	228000	94500	0.564	53298
7	321000	229000	92000	0.513	47196
8	319500	230000	89500	0.467	41796.5
9	318000	231000	87000	0.424	36888

amount to be recovered by the project is $550000

total present value of cash inflows( last coloumn of the table) after 8 years totals to $530668

total present value of cash inflows after 9 years totals to $567556

So the amount is recovered between 8 years and 9 years, that is 8.5 years