Question

please do not use an excel

An engineer at BullyDawg, Inc. is responsible for preparing a cost analysis on two potential pieces of equipment. ne of the pieces of equipment is manufactured by Pacific America and has an expected life of 10 years. The other alternative is produced by the Allied Company and is expected to last for 5 years. The calculations for the equipment from Pacific America have already been calculated, and showed a NPW of $132,800 (based on the given lifespan and an MARR of 7%) Given the data below and Present worth Analysis, perform the appropriate calculations for the equipment from the Allied Company. Which, ifany, of the two alternatives should the BullyDawg, Inc. choose? MARR-7%. (SI 57,274) Allied Company Initial Cost S150,000 S50,000 in years 1 and 2; $75,000 in years 3,4, and S S5,000 per year Benefits O&M Costs Life (in years)

Answer 1

SOL:-

Net present value (NPV) is a method of determining the current value of all future cash flows generated by a project after accounting for the initial capital investment. It is widely used in capital budgeting to establish which projects are likely to turn the greatest profit.

The formula for NPV varies slightly depending on the consistency with which returns are generated. If each period generates returns in equal amounts, the formula for the net present value of a project is:

NPV = C x {(1 - (1 + R)^-T) / R} − Initial Investment

where C is the expected cash flow per period, R is the required rate of return, and T is the number of periods over which the project is expected to generate income.

However, many projects generate revenue at varying rates over time. In this case, the formula for NPV is:

NPV = (C for Period 1 / (1 + R)¹) + (C for Period 2 / (1 + R)²) ... (C for Period x / (1 + R)^x) - Initial Investment

Here, we will use this second formula.

NPV(Allied company)= [50000/(1+.07) +50000/(1+.07)^2 +75000/(1+.07)^3 +75000/(1+.07)^4 +75000/(1+.07)^5] - 150000

=46728.971 + 43671.936 +61222.340 +57217.14090 +53473.964631 -150000

=262314.35253 - 150000

= $112314.35253174

conclusion:-

since, the NPW of the Pacific America company is higher than the Allied company (132800 > 112314.352) , the BullyDwag company should choose to invest in the equipment manufactured by the Pacific America company .