question archive Three mutually exclusive alternatives are being considered for the production equipment at a tissue paper factory
Three mutually exclusive alternatives are being considered for the production equipment at a tissue paper factory
Subject:FinancePrice:2.87 Bought7
Three mutually exclusive alternatives are being considered for the production equipment at a tissue paper factory. The estimated cash flows for each alternative are given in Table 2. (All cash flows are in thousands.) Which equipment alternative, if any, should be selected? The firm’s MARR is 18% per year. Please state your assumptions.
Table 2
| Alternative A | Alternative B | Alternative C | |
| Capital investment | $1900 | $4,200 | $7,500 |
| Annual revenues | $3,200 | $5,900 | $7,500 |
| Annual cost | $2,100 | $4,000 | $5,000 |
| Market value at end of useful life | $100 | $400 | $650 |
| Useful life (years) | 5 | 10 | 10 |
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Answer:
AW of option A = -1900*(A/P,18%,5) + 3200 - 2100 + 100*(A/F,18%,5)
= -1900*0.319778 + 3200 - 2100 + 100*0.139778
= 506.40
AW of option B = -4200*(A/P,18%,10) + 5900 - 4000 + 400*(A/F,18%,10)
= -4200*0.222515 + 5900 - 4000 + 400*0.042515
= 982.44
AW of option C = -7500*(A/P,18%,10) + 7500 - 5000 + 650*(A/F,18%,10)
= -7500*0.222515 + 7500 - 5000 + 650*0.042515
= 858.77
As AW of option B is highest, it should be selected
